Regional Outlook: Southeast Asia 2004-2005

Regional Economic Trends

46 ECONOMIC OUTLOOK REGIONAL ECONOMIC TRENDS By Denis Hew S outheast Asia suffered a setback on its road to economic recovery in 2003. In the first half of 2003, regional economies were particularly affected by the Iraq War and the Severe Acute Respiratory Syndrome (SARS) outbreak. However, the relatively quick passing of these two major events as well as economic recoveries in the United States and Japan augur well for the region’s economic outlook in 2004 and 2005. According to the Asian Development Bank (ADB), the total economic costs of SARS in East and Southeast Asia are estimated at US$60 billion. The services sector, especially tourism and retail industries, were hardest hit. Nevertheless, the impact of SARS on the region has turned out to be less damaging than earlier anticipated. The epidemic, which broke out in March 2003, was generally contained by mid-2003. In fact, tourist arrivals and retail sales in SARS-affected countries such as Singapore and Hong Kong improved significantly by the third quarter of 2003. Although there are some concerns that SARS may re-occur in the near future, it is expected that the region’s public health services would be better prepared to deal with the disease. The economic outlook appears optimistic, with the region poised for a moderate comeback in 2004. The ADB forecasts that Southeast Asia will grow by 3.9 per cent in 2003 and by 4.9 per cent in 2004. In a recent economic report on East Asia, the World Bank highlighted several reasons for being sanguine, which include: • The global economy is showing signs of recovery, driven by stronger economic growth from the United States and Japan. • The world high technology industry is beginning to improve after a three-year slump. • The emergence of China as a global industrial powerhouse is boosting trade and revitalizing intra-regional production networks in East Asia. • Domestic economic and financial conditions in the region have significantly improved, e.g., private consumption and investment have strengthened, corporate and banking sectors are healthier. The World Bank also highlighted two possible risks to this nascent global recovery. One is the failure at the recent WTO trade talks in Cancun which could lead to longer-term damage to the international trading system (see box entitled, “WTO at the Crossroads and the Road Ahead for ASEAN”). The other is the slow progress made in institutional and governance reforms in East Asia could adversely affect its global competitiveness. Another major concern is the rising threat of terrorism in Southeast Asia which could divert valuable foreign direct investments (FDIs) to perceived safer regions. At the 2003 ASEAN Summit in Bali, ASEAN leaders have agreed to establish an ASEAN Economic Community (AEC) by 2020. The idea of an AEC was first proposed by Singapore Prime Minister Goh Chok Tong at the 2002 ASEAN Summit in Phnom Penh. The AEC is one 47 THE ASEAN-10 of three pillars (the other two being the ASEAN Security Community and the ASEAN Sociocultural Community) that make up the ASEAN Community as declared by ASEAN leaders in the Bali Concord II. In line with the ASEAN Vision 2020, it is envisaged that the AEC will be a single market and production base with free flow of goods, services, investments, capital and skilled labour. Out of these three pillars, it is perhaps the AEC that has the greatest chance of being fully realized by 2020. This is because ASEAN has already put in place the building blocks towards achieving an integrated ASEAN market. This would include economic integration initiatives such as the ASEAN Free Trade Agreement (AFTA), ASEAN Framework Agreement on Services (AFAS) and the ASEAN Investment Area (AIA). Looked at holistically, the formation of an AEC could be seen as a logical step up the economic integration ladder. The High Level Task Force (HLTF) on Economic Integration has unveiled numerous initiatives with clear timelines (many within the next two years) to expedite the economic integration process to realize the AEC. These initiatives — which include the fast-track integration of priority sectors and creating a more effective dispute settlement mechanism — are clearly very ambitious. Besides the “ASEAN-X” formula, ASEAN could also use the “2+X” approach where two member countries that are ready to integrate certain sectors can go ahead first. In fact, the latter approach would particularly benefit Thailand and Singapore as both countries are keen to integrate their economies before 2020. All these initiatives do seem to indicate that ASEAN is...