ASEAN and The Private Sector

Transcription

1 ASEAN and The Private Sector By Rodolfo C Severino Jr. Secretary-General, Association of Southeast Asian Nations Mercantile Club, Jakarta, 23 April 1998 As you know, I am fairly new to Jakarta. I came to this city, which I had visited many times before, on the first day of 1998 and assumed my new job a few days after that. Very soon afterwards, by way of making me feel welcome to this country and this city, the Mercantile Club did two things. One was to offer me its very valuable and prestigious membership. The second was to invite me to speak here today. So, let me thank the Club, our club, for this chance to exchange views with fellow-members and their guests. I value this chance very much. From the beginning of my stewardship at ASEAN, I have placed great emphasis on the importance that ASEAN attaches to the role of the private sector in ASEAN's activities, in ASEAN cooperation, in the very concept of ASEAN. For a long time, ASEAN's leaders and ASEAN's Ministers have made it clear that they consider the private sector to be the engine of the region's unprecedented growth, that it is the private sector that largely carries out the transactions that make the creation of ASEAN's wealth possible, and that, therefore, the private sector must be a part of ASEAN cooperation and of ASEAN decision-making. Consultation with the private sector and partnership with it are an essential part of what ASEAN is all about and of how ASEAN goes about its mission. As I went on my round of calls on and consultations with ASEAN's member-states, this was impressed upon me yet again by the heads of government, by ministers, and by the business leaders whom I saw. Today, I will take advantage of this opportunity and try to get your thinking on three subjects that I wish to raise with you. I want to summarize for you the ASEAN response to the financial crisis that has hit our region particularly hard. I want to update you on the progress that we have made in ASEAN economic cooperation. And I would like to exchange views with you on the future direction of ASEAN. I will focus on the private sector's place in all of this - its role, your role, and what you can do. Regional Financial Crisis and ASEAN Response The current financial turmoil has taught us one lesson, among many, and that is how much the market increasingly views the ASEAN countries as one. The devaluation of the Thai baht on 2 July 1997 set off a train of events that depreciated the currencies of

2 almost all the countries of the region and, to one degree or another, hammered the economies of ASEAN, precipitating a crisis of confidence, shaking the financial systems, swelling the cost of doing business, crippling countries capacity to trade, sending prices and interest rates sky-high, bankrupting firms, throwing people out of work, and considerably slowing growth. While one can dismiss this phenomenon of contagion as a result of market panic, I think that it also reflects the degree of economic integration that ASEAN had achieved. Ever since ASEAN was created in 1967, its leaders have always understood that an indispensable foundation of regional peace is a strong network of close economic links among the member-states. The building of such a network proceeded cautiously and slowly, with preferential trading arrangements, various industrial cooperation schemes, and so on. In 1992, ASEAN's leaders decided that it was time to launch the region on the road to real economic integration by starting the process of creating the ASEAN Free Trade Area or AFTA. This was followed by equally ambitious regional initiatives, with the leaders' decision, at the 5th ASEAN Summit in December 1995, to liberalize trade in services, cooperate on intellectual property, establish an ASEAN Investment Area, and initiate a new industrial cooperation scheme called AICO. This growing economic integration means that ASEAN countries will increasingly share good times and bad times. In addressing the financial turmoil in the region, each ASEAN member has had to take its own national measures. All ASEAN countries have reduced government expenditures, tightened monetary policies, increased interest rates, sought to improve the regulation and supervision of their financial systems, and deregulated important sectors of the economy. You all know, of course, what the Indonesian Government has been doing to deal with the financial problem in this country. As we are all too well aware, however, because of the very success that ASEAN has achieved in regional economic integration, the problem is, above all, a regional one, as well as a national and a global concern. Recognizing this, ASEAN has worked together - bilaterally, as a group, and in concert with other countries and institutions. The ASEAN heads of government and ministers have been visiting each other with unprecedented frequency to consult and to offer assistance in the form of commodities, financial support, policy and technical advice, and moral encouragement. ASEAN's leaders, ministers and officials have been meeting intensively to address the crisis and devise measures to deal with it. They have presented a common front in the international financial institutions, in APEC, in the Asia-Europe Meeting. They have, together, pressed the governments of the Group of 7 to keep their markets open to ASEAN exports, encourage their banks to give relief to debtor-companies in ASEAN and maintain credit to the ASEAN economies, and help strengthen confidence in the prospects of an early ASEAN recovery. They have, together, urged that primacy be

3 given to the stabilization of exchange rates. They have, together, called for greater flexibility in the application of IMF programs so as to protect the poor and other vulnerable groups. ASEAN's Finance Ministers, in their meeting in Jakarta on the 28th of February, agreed on two specific measures to deal with the financial problem. One is the use of ASEAN currencies in the settlement of intra-asean trade, which had been proposed by two or more of ASEAN's leaders. The other is the establishment of an ASEAN monitoring mechanism to serve as an early-warning system for future financial problems. The modalities for using ASEAN currencies for intra-asean trade are to be worked out by each pair of trading partners, while the monitoring mechanism is being put together by the Finance Ministers, the ADB and the ASEAN Secretariat. Already, one thing is clear. The success of both of these initiatives will require the support not only of ASEAN governments but also of the private sector. The use of ASEAN currencies in intra-asean trade can flourish only if the private sector is willing to accept rupiah, ringgit, pesos, and baht as payment in lieu of US dollars. Clearly, ASEAN governments must make it attractive for the private sector to accept regional currencies in their ASEAN transactions. But the private sector needs to make clear what measures have to be packaged together to make it worthwhile to accept payments in regional currencies rather than US dollars. There is ample scope for such a proposal to work. Intra-ASEAN trade has already reached a level -- US$80 billion in that would make such a plan worthwhile. We do not have precise figures on trade in services, but non-merchandise trade among ASEAN countries - for example, aviation-related services and hotel-related services -- had certainly been growing quite strongly before the financial turmoil struck. We have already broached this issue to the private sector. The Secretariat convened a private-sector roundtable on the financial crisis in ASEAN on March 1998 involving the Chambers of Commerce and Industry, other business goups, bankers, accountants, and credit rating agencies. The roundtable endorsed the proposal on the use of ASEAN currencies. As a follow-up to that, the ASEAN Bankers Association, at its Council meeting on April 1998 in Singapore, put forward several proposals on the subject. These included steps to encourage businessmen to use ASEAN currencies. For instance, discounted trade bills or letters of credit denominated in ASEAN currencies could be regarded as liquid assets that may be used to satisfy bank-reserve requirements. Interest earned on cross-border trade-financing based on ASEAN currencies could be freed of taxes. ASEAN governments could guarantee letters of credit denominated in ASEAN currencies.

4 The ASEAN bankers also suggested the use of a netting mechanism to reduce the volume of foreign-exchange transactions. They urged a review of government regulations that impede the use of ASEAN currencies, such as capital controls. Hedging facilities, they pointed out, need to be developed. In the absence of cross-currency quotations among ASEAN currencies, the central banks would have step in to provide these quotations. I encourage you, particularly those who are involved in a substantial way in intra-asean trade, to contribute your ideas as to how this scheme can work. The scheme is not a cure-all. It is no panacea. But it should help in encouraging more trade among ASEAN countries, relieve somewhat the pressure on ASEAN traders to acquire US dollars for trade, and stimulate economic activity within the region. The other initiative is the setting up of a monitoring mechanism. Its core would be a set of macroeconomic and financial indicators to be regularly collected and monitored by the ASEAN Finance Ministers. The indicators are meant to serve as an early-warning system to alert the Ministers to any impending imbalance in a member-country. The mechanism will be considered in detail by the ASEAN Finance Ministers when they gather for the ADB meeting in Geneva at the end of this month. Initially, it will be operated within the ADB. If all goes well, it will eventually be transferred to the ASEAN Secretariat. The ASEAN Secretariat is, therefore, deeply involved in this process, and I would be grateful for your thoughts on how the private sector views this particular measure. Like the use of ASEAN currencies for intra-asean trade, the monitoring mechanism has to have the support of the private sector if it is to work. The private sector, for instance, has to be willing to share important information, since it is clear from the crisis that a lot of information needs to be made available. It is important for the private sector to support this initiative. It is, after all, meant to prevent future catastrophes like this from happening again, and surely this is in the interest of all -- the private sector's and the entire nation's. Update on ASEAN Economic Cooperation The world's and the region's attention has been focused on the financial crisis. As I said earlier, ASEAN has responded directly to the crisis through closer cooperation and mutual support. However, the broader process of ASEAN economic integration and cooperation has not been neglected. Indeed, part of ASEAN's response to the financial crisis has been not only to maintain but, indeed, to accelerate this broader process. ASEAN's heads of government, Finance Ministers and Trade and Industry Ministers have categorically and publicly re-affirmed their commitment to this. They know that the enduring way to strengthen and stabilize the region's currencies and economies is to attract long-term investments by assuring those investments of larger and more open markets.

5 AFTA Over the past five years, ASEAN has been remarkably successful in reducing tariffs under the scheme called Common Effective Preferential Tariffs, or CEPT, leading to the ASEAN Free Trade Area. With the accession of Laos and Myanmar to the AFTA agreement, the number of tariff lines in the CEPT Inclusion List for 1998 has reached 45,855, which represents about 82 percent of all tariff lines in the nine ASEAN countries. The average tariff rate is now 5.19 percent, down from percent in Attention has now turned to trade facilitation, particularly through customs cooperation and the elimination of technical barriers to trade. We are harmonizing customs rules and procedures, particularly those on tariff nomenclatures and customs valuation. We have targeted the adoption of an ASEAN Harmonized Tariff Nomenclature system by the year 2000 and are moving speedily toward a GATT Valuation Agreement. We are drafting a framework agreement on mutual recognition arrangements in standards and conformance, so that product-related standards and regulations do not become technical barriers to trade. At the same time, we are strengthening the rules and disciplines of the CEPT Agreement. In November 1996, ASEAN adopted a dispute-settlement mechanism, largely patterned after the WTO mechanism, covering all ASEAN economic agreements. Very soon, the ASEAN Economic Ministers are to sign a Protocol on Notification Procedures to provide advance warnincy of actions or measures that can have an adverse effect on concessions granted under an existing ASEAN agreement. Such protocols represent the evolution of ASEAN economic cooperation towards a more rules-based system. The effect of CEPT-AFTA has been quite dramatic. In terms of the value of exports among the first six ASEAN countries, intra-asean trade grew from US$36.8 billion in the first six months of 1996 to US$44.8 billion in the first six months of 1997, or by almost 22 percent. This is in line with the 28.8 percent average annual growth of intra-asean exports from 1993 to In contrast, total exports of the ASEAN Six gew from US$153.9 billion to US$167.4 billion, or by 8.8 percent, from the first six months of 1996 to the first half of As a result of the more rapid expansion of intra-asean exports, their share of total ASEAN exports grew from almost 24 percent in 1996 to 26.7 percent in As I indicated earlier, ASEAN has responded to the financial crisis by deciding not just to maintain but to accelerate the AFTA process. As a direct response to the financial crisis, ASEAN's heads of government issued a mandate to this effect during their informal summit last December. The governments are now working on several ways in which this could be done. They

6 have agreed that the acceleration of AFTA's implementation not only involves time frames, but should also aim at the broader dimension of economic integration, covering both the liberalization and the facilitation of trade. They have also agreed that the acceleration of AFTA should involve all ASEAN members, old and new. Currently a number of proposals are being considered, including: reducing CEPT tariff rates to 0-5 percent by the year 2000; dropping CEPT tariff rates to zero by the year shortening the number of products in the General Exception List; and reducing the number of products in the Sensitive and Highly Sensitive Lists. ASEAN would be grateful for your ideas, from the point of view of business practitioners, on ways of comprehensively accelerating AFTA, so as to benefit the region's businesses, economies and peoples in a balanced way. Industrial Cooperation Since 1978, ASEAN has gone through a number of schemes for industrial cooperation -- from the ASEAN Industrial Program (AIP) through the Brand-to-Brand Complementation (BBC) to the ASEAN Industrial Joint Ventures (AIJV). These are now being replaced by a new program called ASEAN Industrial Cooperation, or AICO, which became operational on 1 November This scheme aims to encourage joint manufacturing activities to improve the competitiveness and complementarity of ASEAN-based companies. It is open to any company incorporated and operating in ASEAN that undertakes resource-sharing, industrial complementation or any industrial cooperation activities. Each company must have a minimum ASEAN national equity of 30 percent. All products manufactured by participating companies under the AICO scheme can immediately enjoy the ultimate 0-5 percent CEPT tariff rates, without having to wait for the year All products are eligible except for those under the General Exception List of the CEPT program. In designing the AICO scheme, ASEAN worked together with the private sector. That collaboration has borne fruit, generating a great deal of interest from such companies as Matsushita, Toyota, Sanden, Volvo and Goodyear. Twenty-six AICO applications have been received by member-countries. Two, those of Sanden and Volvo, have been approved. The rest are in various stages of consideration. To make AICO more attractive and to allow new investors to participate in the scheme, ASEAN has decided that pre-investment AICO approval could be granted to applicants that have not yet invested in the region. The pre-investment approval specifies in detail the terms and condition that must be fulfilled by the investor. Therefore, investors whose decisions or commitments are conditioned upon the assurance that their intended AICO arrangement would be granted approval can now submit their proposals before committing actual investment. Once pre-investment

7 approval is given, the investor must make the actual investment within one year and, upon establishment of the project, submit an official AICO application to form the AICO arrangement. Approval would be granted to the application almost automatically, provided that it is basically the same as the one submitted at the pre-investment stage. Services ASEAN economic integration goes beyond merchandise trade and investment; it embraces trade in services as well. This mandate derives from the 5th ASEAN Summit in December ASEAN members have completed their negotiations on trade in services and arrived at an initial package of commitments on 30 June (Please see the attached table.) The initial package contains commitments from all nine ASEAN members on market access and national treatment in five sectors: air transport, business services, maritime transport, telecommunications and tourism. Implementation of the commitments began on 31 March Attention is now turning to completing the final package of commitments by 31 December We expect commitments to be made also in construction and financial services, and that all member-countries, including Laos and Myanmar, will work towards making commitments in all seven service sectors identified by the 5th ASEAN Summit in December Sixth ASEAN Summit ASEAN cooperation is being intensified in other, broader, bigger ways. During their fifth summit meeting in Bangkok in 1995, ASEAN's leaders decided to hold annual summits -- two informal meetings between the triennial formal summits. In December this year, the sixth formal summit will take place in Hanoi. The leaders have decided that the time is now past for declarations, and that it is time for concrete measures of implementation. The leaders, therefore, expect to agree on a plan of action to carry out the ASEAN Vision 2020 statement that they issued at their summit in Kuala Lumpur last December. The Hanoi Plan of Action will be the first in a series of six year plans to bring ASEAN Vision 2020 to reality. ASEAN Vision 2020 represents what the leaders want Southeast Asia to be by the year Part of the vision is an ASEAN Economic Region where goods, services and investments flow freely and efficiently across national boundaries. The Hanoi Plan of Action would thus include ways of achieving market integration in ASEAN that would encompass not only trade liberalization but also the development of transport and communications networks. It could also contain a program on information technology. It could include the development of the Mekong Basin. Other parts of the plan could deal with human resource development, tourism, finance, science and technology, the environment, and food security.

8 The Hanoi Plan of Action should offer enormous opportunities to the private sector -- opportunities to contribute ideas and proposals for the plan of action itself, and opportunities for investment and other forms of profitable participation. Many elements of the Plan of Action, particularly those dealing with infrastructure, would require substantial investments from the private sector. If ASEAN is to realize its vision of one economic region, its physical integration should be a major priority. ASEAN's leaders have already identified a number of important infrastructure projects which are crucial to the integration of the region. These include the Singapore-Kunming rail link, the ASEAN Highway Network, and the trans-asean energy network consisting of the ASEAN Power Grid and the trans-asean Gas Pipeline. Conclusion I would like to close by returning to the idea that I started out with in this talk -- the pivotal role that the private sector plays at this time. At this critical stage in ASEAN's history, it is urgent for ASEAN governments and the private sector to work together to restore confidence in the region and set up mechanisms to help prevent crises such as we are experiencing today from recurring in the future. I have outlined several steps that ASEAN governments are working on, including the greater use of ASEAN currencies, the setting up of a monitoring mechanism, and the acceleration of regional economic integration schemes, particularly the implementation of AFTA. I have alerted you to the plans which ASEAN is developing to bring to reality its vision for I call upon the private sector to participate actively in the urgent effort to reassure the markets and provide the foundations for putting ASEAN's economies back on the road to recovery. Much is to be done. Great is the stake. Enormous are the benefits for all of us and for all our people. TABLE 1: SUMMARY OF INITIAL PACKAGE OF COMMITMENTS COUNTRIES COMMITMENTS Brunei Darussalam Indonesia Air Transport Aircraft Repair and Maintenance Services (CPC 8868) Maritime Transport International Passenger Transport (CPC 7211) International Freight Transport (CPC 7212) Budget Hotel (CPC 64110) Resort Hotel/Chalets (CPC 64110) Maritime Transport

9 Laos Malaysia Myanmar Philippines Singapore Thailand Vietnam Maritime Cargo Handling Services (CPC 741) International Passenger Transport Excluding Cabotage (CPC 7211) International Freight Transport Excluding Cabotage (CPC 7212) International Hotel Operator Consultancy Services International Hotel Operation (CPC ) Air Transport Selling and Marketing of Air Transport Services Computer Reservation System Services Maritime Transport Maritime Freight Forwarding Services Convention Centre (over 3000 participants) Theme Parks Theme Parks Business Services Auditing Services: Covering Financial, Auditing and Accounting Review (CPC 86211/86212) Pension House (CPC 64110) Tourist Inn (CPC 64110) Apartment Hotel (CPC 64110) Air Transport Selling and Marketing of Air Transport Services Travel and Tour Operators Services (CPC 7471) Maritime Transport Freight Transportation (CPC 7212) Customs Clearance Services Motel Lodging Services (CPC 64120) Other Lodging Services *Holidaying Center and Holiday Home Services (CPC 64192) *Camping and Caravan Site Services (CPC 64195) Theme Parks, Amusement Parks (CPC 96194) Marina Facilities Telecommunication Electronic Mail Services (CPC 7523) Voice Mail Services (CPC 7523)

10 Electronic Data Interchange Services (CPC 7523) Telex Services (CPC 7523) Telegraph Services (CPC 7523) International Hotel Operation (CPC ) Note: CPC stands for the Central Product Classification developed by the UN. Source: 04/1998