Introduction

INTRODUCTION The year 2002 opened with expectations of economic rebound in Southeast Asia after a year of generally sluggish growth but by the second quarter it was becoming clear that the three traditional engines that drove regional economic growth were spluttering — the U.S. economy did not sustain the hoped-for growth;Japan continued to be mired in recession; and Europe was experiencing economic slowdown. The political and economic dynamics were further complicated by the spectre of international terrorism, which acquired strong regional resonance after the devastating Bali bombings in October. The Bali bombings refocussed attention on the connections between regional and global networks of terror. While not all regional governments necessarily shared the same domestic concern with Muslim militancy or radicalism, the challenge of resurgent political Islam and the intensified religiosity among Muslim populations in the region could not be dismissed. Fortuitously the external security environment of Southeast Asia remained relatively stable during this time. The new global challenge posed by terrorism resulted in a positive shift in relations among the major external powers — most notably between the United States and China. The threat of international terrorism became a point of overlapping though not necessarily congruent major power security interests. It also tempered somewhat, especially after the Bali bombings, regional differences towards security co-operation with the United States. But differences in domestic political circumstances did complicate attempts at a coherent regional response. If 2002 began with regional anticipation of the political fallout of the war against international terrorism, it ended with nervous tension over the imminence of war in Iraq. The year also saw ASEAN continuing to address the sense ofdrift. Persisting economic strains, the pressure of domestic politics, and a new intramural competitiveness also had their negative effects on certain bilateral relations. Malaysia-Singapore differences centred on the pricing of Malaysian water supplied to Singapore and rival claims over Pedra Branca/Pulau Batu Putih were among the irritants that resurfaced during the year. Malaysia's relations with Indonesia and the Philippines also soured over Kuala Lumpur's mass deportations ofillegal Indonesian and Filipino migrants. In mainland Southeast Asia border tensions between Thailand and Myanmar led to the closure of their common border for nearly five months. However, strains in bilateral relations did not immobilize ASEAN. Also, one hopeful development in 2002 was that extra-regional powers had not written off ASEAN as a collaborative region for mutual economic gains. China, Japan, the United States, and India courted ASEAN with offers of free trade agreements and new economic ? Introduction partnership pacts. Such overtures underlined for ASEAN the importance of enhancing regional integration and competitiveness if it were to ride on such opportunities. Among the more important factors shaping the fortunes of the individual countries of Southeast Asia to varying degrees were the lingering consequences of the Asian economic crisis of 1997-98, the pull of foreign direct investments to China, the challenge from political Islam, and the threat of terrorism. However, equally important were the quality of institutions and governance and the will to carry out reforms. Indonesia, the region's biggest country and key member of ASEAN, presented a mixed picture. On the positive side, macroeconomic stability was maintained, there was a new recognition of the reality of the terrorist threat to the country, significant progress was made in uncovering the network behind the Bali bombings, the Malino peace agreement was signed to end the fighting in Maluku, and a ceasefire agreement, though fragile, was reached with the Aceh rebel movement. However, investor sentiment, the key to economic recovery, was weak. Foreign and domestic investment approvals declined significantly, and there were reports of Japanese and Korean companies relocating investments out of Indonesia. Implementation of the necessary legal and economic reforms was either lacking or slow. With calls mounting for the end of the International Monetary Fund (IMF) programme when it runs out at end of 2003, the future prospects for continued reform did not look good, especially since the run-up to the elections of 2004 is likely to lead to populist posturings. Malaysia registered a relatively healthy 4.2 per cent economic growth, cleaned up most of the bad loans in the banking system, and made...