The Latecomers

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13 The Latecomers: Opportunities, Challenges, and Comparisons O U T L I N E I Introduction II Europe Versus Asia

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V The ASEAN Countries

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III Economic Cooperation

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IV Regional Multilateralism

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VI China in Asia VII Conclusion

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I INTRODUCTION As argued in the “flying geese” model, the economic rise of Japan provided resources to neighboring economies to also rise. The first group of “geese” that lifted off economically consisted of the East Asian economies of South Korea, Taiwan, Singapore, and Hong Kong after the 1970s. The war between North and South Vietnam in much of the 1960s led to the worry that communism would spread to other countries in Southeast Asia, typically Singapore, Thailand, Malaysia, Indonesia, and the Philippines. At the height of the Vietnam War in 1967, these five countries then established the Association of Southeast Asian Nations (ASEAN) that was meant to provide political affiliations. Economically, with the exception of Singapore, these Southeast Asian countries did not have much to offer, because their level of development remained low in the 1960s. With similarities in their economic structures, the other four Southeast Asian countries could not exercise economic complementarity. With the end of the Vietnam War in April 1975, Vietnam’s socialist economy suffered as it was “isolated” by the international community. Although Sweden was the first western country to establish a diplomatic relationship with Vietnam and exchanged embassies in June 1970, it was only in 1986 with the policy of “Doi Moi” (renovation) that a market economy was adopted gradually. With stability restored, and at the same time the economic rise of East Asian “geese,” a “showcase” and references for the ASEAN countries was developed. With the rapid growth in Singapore, the other ASEAN countries determined to be the next group of “geese” that would join the growth ladder. At the beginning, ASEAN was not that much of an economic association, but its bonds actually expanded to incorporate other new members within Southeast Asia, such as Brunei Darussalam, Cambodia, Laos PDR, Myanmar, and Vietnam. Hence, although ASEAN is not that strong, ASEAN does comprise a sizable region in Southeast Asia on both the supply and demand sides of the economic equation. On the supply side, ASEAN

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provides a good source of labor and can become the destination for production of light manufacturing. On the demand side, the rise in income and the sizable population provide a good market for consumer goods. While ASEAN was getting ready to welcome the third batch of Asian “geese,” the situation changed rapidly when China’s low production costs posed direct competition to ASEAN countries. By the 1990s, growth and exports among ASEAN countries had been maintained, but the Asian financial crisis in 1997 2 98 shocked ASEAN as the crisis came suddenly and unexpectedly. Although the IMF and international institutions provided rescue and recommendations, ASEAN member countries managed to tread through the Asian financial crisis and revitalize their economies through further industrial and export expansion. However, some ASEAN members engaged in economic restructuring, but others have been challenged by noneconomic problems, such as frequent changes of government and calls for elections in Thailand, continuous ethnic problems in Malaysia, and religious and ethnic disputes in Indonesia. The high energy price has weakened the exports of ASEAN members, such as Vietnam, as their exchange rates have been constrained by oil imports. The Southeast Asian countries have to perform and position themselves differently from such emerging countries as India, Brazil, Mexico, and South Africa. Other than the environmental and geographical advantages, such as the close geographical proximity to China, conventional investment from Japan, and traditional relationship with the United States, the Southeast Asian countries are comparatively “better off” than other emerging countries. For example, religious problems in Southeast Asia are milder than similar problems in the Middle East countries. The overall education level is higher than other “fragile states” in Africa, and the wider use of English makes it easier to connect with the international community (Lim, 2009; Plummer, 2009; Rosefielde et al., 2011; Whally, 2016). However, while there are favorable “take-off” conditions, their success will depend on the exercise of indigenous factors, such as stability, human capital, business-friendliness, infrastructure, and other social fabrics that make them attractive to foreign investment and able to compete with other emerging countries. In other words, it will be the need to adopt the neoclassical growth model that will improve their domestic economic health, and the appropriate pursuit of “supply-side” economic policies. The ASEAN countries do hold the key to the success of the “Pacific Century” as they form a formidable group of countries, if their political and economic stability can be sustained. The group would become even larger, especially when other emerging countries in the region, typically Myanmar, Laos, and Cambodia, open up and become the next “flying geese.” The economic resources, typically in the form of land and labor, that are released once these countries adopt an industrialization process could have a lasting impact on the region and in the world economy.

II EUROPE VERSUS ASIA By 1973, the European Economic Community consisted mainly of the western European countries that were the prosperous and powerful countries of Western Europe. In the Treaty of Maastricht that formed the European Union (EU), the supranational body expanded to a total of 28 member states, with a number of new members from former Eastern Europe countries. The large EU is meant to promote a single market without national barriers. Because many of the new members are economically weaker and less industrialized, it would be appropriate for the stronger EU members to aid and promote development of the weaker members. Indeed, there seemed to be a good complement between the provision of capital from the stronger members, and the provision of land and labor from the newer members. Indeed, the establishment of the EU has posed challenges to other world regions. There was the argument of “fortress” Europe in the 1980s that could generate “trade protectionism” against other world regions. Following the EU, other trade and economic blocks have been established, notably the establishment in 1994 of the North American Free Trade Agreement (NAFTA) that consists of the United States, Canada, and Mexico. In 1989, the Asia 2 Pacific Economic Cooperation (APEC) was established among a number of Asia 2 Pacific economies. However, when compared to the EU, both NAFTA and APEC deal more with economic cooperation rather than economic integration. However, while the world was watching, the extent of economic integration among EU members did not seem to show strong results. Indeed, instead of the stronger EU members raising the economic strength of the weaker members, it looked more likely that the weaker members were pulling the stronger EU members down through lack of development in business-friendliness and the need for economic rescue due to huge debts. The weaker EU states were taking advantage of the stronger EU states as a source of “bail out,” and that economic ills of the weaker states would have to be contained, rescued, and shared by the stronger states within the enlarged EU.

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The weakness in the euro currency could only benefit such strong export EU members as Germany, but most EU members were becoming less competitive economically. There are other aspects that were eroding economic competitiveness in Europe. The high cost of production, high welfare expenses, high taxes, and large national debts all work against economic competitiveness. For example, the economic situation was worsened by the large influx of refugees from the Middle East and North African countries in 2015 2 16. The generosity and sympathy that German Chancellor Angela Merkel offered was criticized, as other EU members were reluctant and unable to absorb millions of refugees, as that would exert an excessive burden on their economic welfare, and the short-term shock could impose long-term pressure on economic competitiveness and growth (Independent, September 4, 2015; American Thinker, November 24, 2015; Trend News Agency, March 2, 2016; and Mail Online News, March 7, 2016). However, the Asian countries certainly do not have the same degree of protection, bail out, rescue, or assistance from neighboring countries should problems and crises arise. Unlike EU members which are connected by land, many Asian countries are divided by sea. Indeed, Asian countries are very much diversified in economics (stage of development, income per capita, industrialization, etc.), politics (democratic vs undemocratic regimes), race, religion, language, land size, and so on. Each of the Asian economies are effectively “competing” among themselves in the neoclassical sense in that: (1) they have to maintain stability, as instability could result in capital flight that benefitted neighboring economies; (2) they need to show improvement in the domestic economy in terms of infrastructure and business-friendliness, so as to attract foreign investment and trade; and (3) as a region, Asia aims to compete successfully with Europe and other emerging world regions. In other words, there is tight “intraregional” competition within Asia, as catching up becomes a survival strategy. To strive for economic progress is the means to avoid decline. It could be such fear of falling behind and the need to catch up that drives Asia economies forward, and to do the best would mean the need to remove problems and reduce instabilities. One can identify some common economic features. Most Asian economies do not have large national debts, and do promote business-friendliness in the form of lower tax rates and lower welfare expenditure when compared to European countries. The need to compete and the lack of support by neighboring economies has become the Asian legacy in growth and development. In the end, growth can proceed and be sustained in all Asian economies. Such “progrowth” behavior is where most Asian market economies differ from European countries.

III ECONOMIC COOPERATION Echoing the establishment of the EU and the NAFTA, there was the call for more regional economic cooperation within the Asian economies to promote trade and growth. The response came in early 1989 when the Australian prime minister, Mr. Bob Hawke, called for the first meeting of the APEC forum attended by ministers from 12 countries. Due to the June 4th, 1989, political turmoil in Tiananmen Square in Beijing, the three Chinese economies of the People’s Republic of China, Hong Kong, and Chinese Taipei (Taiwan) were excluded until 1991. In the 1990s, the member economies increased to 21. Since 1993, sovereign state members would take turns to host the APEC head of state meeting in November. The annual host of APEC has so far been based in the sovereign states, as both Hong Kong and Taiwan have not hosted APEC. Trade promotion has been the single most important issue. For example, it was intended in 1993 that the leaders’ meeting would help bring the stalled Uruguay Round of trade talks back on track, and leaders called for continued reduction of trade barriers. The Bogor Goals established in 1993 aimed for free and open trade, investment by 2010 for industrialized economies, and by 2020 for developing countries in the Asia 2 Pacific region. Subsequently, the APEC Business Advisory Council (ABAC) was established in 1995. The call for open trade among APEC economies continued, even after the failure of the 2002 Doha Round of trade liberalization talks conducted by the World Trade Organization (WTO). While the Doha Round concerned trade in services, agriculture, and market access, the disputed areas that emerged in 2003 related to the extent of agricultural subsidies and “Singapore issues” that included rules on competition, transparency in public procurement, and investment and trade facilitation. The APEC forum adopted two approaches to economic cooperation. The sector approach allowed exchanges of views, knowledge, and cooperation in such economic sectors as tourism and information technology. The macroeconomic approach involved cooperation in trade and finance, especially after the Asian financial crisis in 1997, when members saw the need to have better exchange of financial information to avoid currency attacks.

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Between 1989 and 1996, the establishment of APEC passed through three stages. The “setting the scene” stage in 1989 2 91 saw the expansion of member economies to include the three Chinese economies. The second stage of 1992 2 95 involved the structural setup. Since 1996, member economies can propose two types of action plans in the cooperation agenda. Individual Action Plans are proposed by individual economies, while Collective Action Plans involve actions applicable to a number of member economies. Over the years, APEC has looked into a large number of issues (Yamazawa, 2012). APEC members do produce a complementary effect, as some members are suppliers of capital while others are suppliers of labor. But, there is also an element of competition, as the rise in exports of one member economy could mean a reduction of exports in a neighboring member. The major criticism is the nonbinding or nonmandatory nature of the agreements, implying that members can discuss and agree, but individual member economies have the choice of not implementing the policy. As compared to the EU, APEC does not have any supranational power over other members. Indeed, it is very often reduced to a “talk shop,” though various “good practices” have been discussed and disseminated in meetings, and member economies have fruitfully learned from each other’s experiences. Another criticism is the geographical diversity among member economies. While the Asian economies are traditionally closer to each other, the incorporation of far economies in South America may be thought to cover too wide a region. Nonetheless, one can only argue that APEC is still in its early stages as a regional body, and is far from being a body that aims at regional integration. Although APEC has developed a high profile internationally since it has been established, there are other regional bodies that serve to promote economic cooperation. Other than the ASEAN countries, there is also the Pacific Economic Cooperation Council (PECC) which is a voluntary organization comprising representatives from businesses, governments, and academies involving research and regular meetings. There are also the international groups of institutions, such as the United Nations representative bodies, namely the Economic and Social Commission for Asia and Pacific (ESCAP), and the United Nations Development Program (UNDP). Both the IMF and the Bank of International Settlement (BIS) have offices in many Asian economies, though their role is more for monitoring than promoting cooperation. Another active body that was initiated mainly by Japan and contributed to economic development among poorer Asian economies is the Asian Development Bank (ADB), established in 1966 with the aim of providing assistance on food production and rural development. By 2014, the ADB had 67 shareholding members, including 48 from the Asia 2 Pacific region and 19 from outside the Asian region. Unlike APEC, the 48 Asia 2 Pacific ADB members consist of a number of small island economies in the Pacific Ocean, such as Samoa, the Solomon Islands, and Tonga, as well as such western Asian countries as Georgia, Nepal, Sri Lanka, Tajikistan, and Uzbekistan. The 19 non-Asian members are mainly developed countries in Europe and North America. The funding of the ADB includes bond issues from world capital markets, as well as contributions from members, retained earnings, and repayment of loans. The discussion on bilateralism versus multilateralism in world trade also affected Asian economies (Bhagwati et al., 1999; Woolcock and Sampson, 2003; Aggarwal and Urata, 2006; Heydon and Woolcock, 2009). The debate dates back to the establishment of the General Agreement on Trade and Tariff (GATT) in 1947, where multilateral trade was discussed between the developed countries and developing countries. The spirit of multilateralism is that once one developed country allowed exports from one developing country, the same developed country would have to open its market to other developing countries. Typically, developing countries wanted to export as much as possible to the developed countries, but developed countries experienced trade deficits with the exporting countries. Before 1994, when the WTO was established to replace GATT, multilateral trade negotiations took place through seven “rounds” of negotiations: Annecy Round (1949), Torquay Round (1951), Geneva Round (1955 2 59), Dillion Round (1960 2 62), Kennedy Round (1962 2 67), Tokyo Round (1973 2 79), and Uruguay Round (1986 2 94). A major conflict in multilateral trade negotiation is that developed countries have different agendas from developing countries, as the concern was the mounting trade deficit of developed countries. Export advantage was also used to politically favor some developing countries. However, accession to the WTO was based on bilateral negotiations. The advantage of bilateral negotiation is that the developed countries can control where imported goods come from. The emphasis has changed from a situation of export promotion or trade expansion to a situation of trade equalization between trade partners (Tait and Li, 1997). All Free Trade Agreements (FTAs) contained an element of trade restriction (Levy, 1997; Baier and Bergstrand, 2007). Over the decades, bilateral trade negotiations have led to the conclusion of a large number of FTAs. A major problem in FTAs is the high administrative cost in the execution of bilateral trade agreements, as there could be similarities and overlap among the FTAs.

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IV REGIONAL MULTILATERALISM After the Asian financial crisis, ASEAN considered the need for the closer formation of an economic community, partly due to the need for greater exchange of information related to potential crises, and the need to face up to competition from the Chinese economy (Sharma and Chua, 2000; Saw, 2007; Severino, 2010). The position and role of ASEAN changed as China emerged as a regional power. Since the turn of the 21st century, and for political, regional, and trade purposes, China, Japan, and South Korea have attempted to develop a closer relationship with ASEAN. While Japan and South Korea are traditional economic partners, the novelty lay in the China 2 ASEAN relationship. Economically, competition exists between China and ASEAN in foreign direct investment and exports, but China in turn can contribute to ASEAN through outward investment and trade, as China needs a steady supply of raw materials. Politically, ASEAN countries would have to strike a balance between the capitalist Japan and the United States, on the one hand, and communist China on the other hand. Each of the ASEAN members has a different relationship with the United States. For example, Vietnam had a war with the United States, but since the turn of the 21st century, the United States has started investing in and trading with Vietnam, as their foreign relationship returned to normal. During the 1990s, Malaysian Prime Minister Mahathir has been critical of the foreign policy of the United States. The Philippines hosted the largest US overseas naval base at Subic Bay, though it was closed in 1992. Indonesia has a long and cordial relationship with the United States, and Indonesia is the only ASEAN member in the G20 group of major world economies. Singapore was the first ASEAN country to sign with the United States the US 2 Singapore Free Trade Agreement (USSFTA) in May 2003, which helped Singapore’s exporters to “benefit from tariff concessions, increase competitiveness and attract investors” (Singapore Government website on FTAs). The highlight of the Singapore 2 US relationship emerged in the visit to the United States by Singapore’s founding father, Lee Kuan Yew, in November 2009. In the meeting, Mr. Lee remarked that: “the 21st century will be a contest for supremacy in the Pacific because that’s where the growth will be . . .. If you (the United States) do not hold your ground in the Pacific you cannot be a world leader” (Shanghaiist.com, November 4, 2009). He basically asked the United States to play a vigorous economic role in the Asia 2 Pacific region. At the 2005 APEC meeting, Brunei, Chile, Singapore, and New Zealand established the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP) that called for greater freedom in trade in goods and services, rules of origin, intellectual property, government procurement, and competition policy, a reduction by 90% of all tariffs between member countries by January 2006, and a zero trade tariff by 2015 (“Trans 2 Pacific Partnership,” Wikipedia). The TPSEP was not an APEC initiative, but the original agreement contained an accession clause that encourages other economies to join. By 2008, TPSEP included Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, and Vietnam, making a total of 12 member countries. The content of the other agreed FTAs would be adjusted to avoid conflicts with the TPSEP. The Obama administration saw the enlarged membership of the TPSEP as a new way to establish a regional multilateral trading body. From January 2008, the United States agreed to enter into talks with the original four TPSEP member countries regarding trade liberalization. After a total of 19 negotiation rounds and a series of meetings, the Trans-Pacific Partnership (TPP) agreement was announced on October 5, 2015. The TPP trade agreement among the 12 Pacific Rim countries was signed on February 4, 2016. As of 2015, other countries interested in TPP membership included South Korea, Colombia, Philippines, Taiwan, Thailand, Laos, Indonesia, Cambodia, Bangladesh, and India. The negotiation to become members of TPP would require dismantling of protectionist policies. The TPP agreement covered comprehensive market access, a regional approach, addressed new trade challenges, and inclusive trade and platforms for regional integration. The agreement concerned public policy matters, as the stated goals were to “promote economic growth, support creation and retention of jobs, enhance innovation, productivity and competitiveness, raise living standards and reduce poverty, promote good governance and transparency and enhance environmental protection.” The lowering of trade barriers and tariffs was supplemented also by the “investor-state dispute settlement” mechanism. There are several arguments that led to the establishment of the TPP. Despite the presence of the WTO that incorporates world trade, some WTO members did not follow the “rule-base” negotiations, violated their own commitments, and did not adopt the WTO policies effectively. Examples included the lack of adherence to intellectual property rights and market openness. The relevant argument is that the TPP is meant to ensure that agreements are kept, and trade activities are conducted fairly and transparently. The TPP was seen politically as the return of the United States into the Asian region to balance the influence of China. The TPP also echoed the concern of Mr. Lee Kuan Yew when he met President Obama in 2009. To check the ideological expansion of China, the “encirclement” theory had reiterated that the United States formed close alliances with a number of East,

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Southeast, and South Asian countries in order to counterbalance China’s political and military influence in the region. Nonetheless, the door for China to seek accession to the TPP is open, as the TPP does welcome new members to join provided members follow, implement, and adhere to the “rule-based” agreements. In short, the TPP is meant to be a regional multilateral trading body that serves not only the interests of the members, but members also practice and commit to the agreements effectively. The Obama administration considered the TPP as a parallel to the similar trade agreement with the EU in the Trans-Atlantic Trade and Investment Partnership (TTIP) agreement. The TPP could be seen as an alternative to the Cancun failure in 2003, when WTO trade talks broke down. As a subset of WTO membership, the TPP shows the possibility of a regional multilateral body in trade negotiation that improves bilateral trade agreements but avoids the complexity of diversity in multilateral trade agreements. The TPP was also seen as an improvement to bilateralism, as it would replace many of the FTAs among members.

V THE ASEAN COUNTRIES The economic success of East Asian economies has prompted the ASEAN countries to follow and become the “latecomer” in the 1980s. However, the “latecomer” advantage was short-lived, as China rose to compete with ASEAN. As compared to ASEAN, China did have a bigger consumer market and an equally low, if not lower, cost of production in the decades before the new 21st century. China has the “absolute advantage” over ASEAN countries when compared to the factors of production of land, labor, and capital. However, the strategy ASEAN can adopt depends on how ASEAN countries sharpen their “comparative advantage” over China. For example, it has been argued that China’s “software” is not keeping up with its “hardware.” Most ASEAN countries are market economies, and even Vietnam has been keen to make economic progress to avoid missing opportunities. Improvement in infrastructure and business efficiency should enrich the competitiveness of ASEAN countries. A successful factor of the East Asian economies has been improvement in indigenous factors as a complement to external factors. Indigenous factors are variables that the domestic economy can improve itself through the adoption of effective policies and implementation of economic openness. Within ASEAN, there can be more “interregional” cross-border development in infrastructure, such as land transport, educational and health facilities, and development in agriculture and industries. Improvements in regional “supply-side” factors can help to raise ASEAN’s overall competitiveness. Eradication of corruption, e.g., should be a great plus to promote business transparency and economic openness. Another advantage ASEAN possesses is its multiracial nature and use of different languages. Individual ASEAN countries should also work to improve their competitiveness by either adopting policies that can raise their “comparative advantages” or strengthen their social and physical infrastructure, so as to minimize their “comparative disadvantages.” For example, Vietnam has a long sea coast on the east, and its economic advantage can be huge, as marine-related activities can be expanded along the long eastern seafront. Trade with China can be expanded in the northern region, while activities in southern Vietnam should relate to other ASEAN neighbors. Vietnam has the advantage of providing land transport and aiding the development of its western landlocked neighbors of Laos and Cambodia, as their exports may have to pass through Vietnam to the east coast. The middle region of Vietnam is rich in agriculture. Thailand has been successful in light manufacturing industries and agriculture, such as rice plantation, and tourism. However, Thailand needs to stabilize its democratic political system to make it more mature and fully functional. Thailand’s political structure comprises four elements that contain the two political factions, the Monarch and the military. In a civically elected democratic regime, the elected government is the ultimate power and rules until the next election. To avoid mutiny, the military is subordinate to the civically elected government. The high ranking military officials in Thailand make known their own political views, which could put pressure on the elected government. In Thailand, and for a number of years since 2009, regular and persistent political demonstrations by opposing political factions reflected political instability, as the sudden removal of a democratically elected government through military intervention dented Thailand’s reliability and hurt economic competitiveness. For example, the series of political protests between March and May 2010 against the government led by the Democratic Party was organized by the National United Front of Democracy Against Dictatorship (UDD), popularly known as “Red Shirts.” The UDD called for the premier to hold elections before the end of the elected term scheduled in 2012. The protests escalated into prolonged confrontations between the protesters and the military. Constitutionally, Thailand’s next scheduled election should have been held in 2012, and that was when

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the people had the lawful right to elect a party to power. Corrupt leaders would have to be dealt with by anticorruption laws, independent from the political system, and not through the sudden removal of a government, which would lead to immediate and costly instability. A “system-led” institution would be more reliable than a “personality-driven” policy. A fully functioning political democracy requires a number of supporting institutions that provide a “check and balance” on government policies and the activities of officials and leaders. Thailand needs to introduce more civic institutions that can provide stability to the democratic system. In other ASEAN economies, such as Indonesia, Malaysia, and Brunei, there is the presence of a Muslim population. There is an urgent need to modernize the Muslim faith to avoid unwanted disturbances and violence. For example, education and connectivity through land transport and opening up of remote villages should form the first stage in modernization, and religious diversity should be considered as an aspect of personal choice, freedom, and pursuits. It is only through the understanding and interaction of different religious faiths that modernization can be promoted. Indeed, these Muslim-populated ASEAN countries could serve as an “early bird” to set up examples of religious modernization for the promotion of peaceful coexistence. Over the centuries, ethnic Chinese had been either brought or immigrated to various Southeast Asian countries. Generations of ethnic Chinese have considered these Southeast Asian countries as their home. Ethnic Chinese have been keen to conduct businesses in export trades, or establish small- and medium-sized industrial enterprises. In Thailand, e.g., ethnic Chinese have been integrated into the Thai economy through the change of names. In the Philippines, partly because of its long exposure to foreign relations and the Catholic faith, ethnic Chinese are not considered as a different ethnicity. However, the same is not true in Malaysia and Indonesia. Despite the rapid economic growth in Malaysia, there are still clear laws that discriminate against ethnic Chinese. For example, businesses owned by ethnic Chinese need to have a Malayan partner, and study of the Chinese language is prohibited in schools. In Indonesia, ethnic Chinese have been used as scapegoats in economic downfalls and recessions, and violent “antiethnic Chinese” clashes have broken out, though these are rare. The political reasons for these “apartheid-like” policies is to promote opportunities for the nonethnic Chinese population, but it is probable that such policies could be costly in terms of job creation and economic competitiveness. When troubles occurred, “brain-drains” and “capital flight” could easily occur in Malaysia and Indonesia. The divisive policy on ethnic Chinese in both Malaysia and Indonesia definitely posed higher economic costs than political benefits. Discriminatory laws and practices should be repealed. On the contrary, huge potential will be realized once the discriminatory policy is removed. The Chinese language will become useful for cross-border businesses with China, and the additional investment will open up more job opportunities for people with different ethnic backgrounds. The provision of equality of opportunity is the best way to eradicate discrimination. Both Malaysia and Indonesia do not need to look far, as good lessons can already be seen from the development experience of Singapore. Individuals with different racial backgrounds are employed in the government. Singapore’s ethnic diversity has become a “comparative advantage.” To remove discrimination is to promote opportunity and enhance competitiveness. The Philippine economy was regarded as the second largest economy after Japan at the end of the Second World War, but the various forms of political high-handedness, including the declaration of Martial Law for the decade 1972 2 81 had eroded Philippine’s economic competitiveness as an investment destination, especially with the concurrent rise of other East Asian economies in the same period. The Philippines’ geographical features comprise a large number of islands where typhoons and hurricanes are common, resulting in natural destruction and loss of human lives. The solution can only be a long-term policy on the strengthening of infrastructure so as to avoid the loss of lives and minimize destruction. The building of stronger residences away from the oceanfront, and provision of stronger embankments can protect properties and reduce the rescue cost. These infrastructures may be costly, but the reduction in loss of lives and the minimization of destruction will produce a longterm positive impact on the Philippine economy. In short, the two aspects for the Philippine economy to maintain sustainable growth are development in infrastructure and further industrialization. The success of Singapore’s “supply-side” economics can provide good lessons for other ASEAN member countries. As compared to China and other emerging countries, ASEAN members will be strong if the economic foundations and fundamentals are improved and strengthened; ASEAN does have good potential in global development, especially as it also provides a sizeable consumption market in the region. In a nutshell, while it has been argued that China is the “latecomer” that has competed away the advantages of ASEAN, an improved ASEAN would in turn pose a challenge to China. Indeed, ASEAN can actually be the next “newcomer” to China as China matures and faces rising costs and weak fundamentals. The economic strength of Southeast Asia can be seen from the World Bank data. Other than the performance of GDP and GDP per capita, as shown in Fig. 13.1, the other domestic economic aspects include fiscal balance

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(B) GDP (Constant 2005 US$) 12,000 10,000 Malaysia Philippines Singapore

US$ Mil

Indonesia

Thailand

8000 Timor-Leste 6000

Lao PDR

4000

Cambodia

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

(D) GDP per capita (Constant 2005 US$) 40,000 35,000 30,000

Lao PDR

25,000

Timor-Leste

US$

Cambodia

15,000

Philippines

10,000

Indonesia

Singapore

20,000

Vietnam

Malaysia Thailand

5000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US$

(C) GDP per capita (Constant 2005 US$) 2000 1800 1600 1400 1200 1000 800 600 400 200 0

Brunei

2000

Vietnam

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

US$ Mil

(A) GDP (Constant 2005 US$) 500,000 450,000 400,000 350,000 300,000 250,000 200,000 150,000 100,000 50,000 0

FIGURE 13.1 GDP and GDP per capita of ASEAN countries.

(Fig. 13.2), and debt-to-GDP ratio (Fig. 13.3). The two external economic performers include total export performance (Fig. 13.4) and inward foreign direct investment (Fig. 13.4). As far as GDP is concerned, the original five ASEAN members of Indonesia, Singapore, Malaysia, the Philippines, and Thailand are the better performers, followed by Vietnam as shown in Fig. 13.1A, while the remaining four, shown in Fig. 13.1B, are the weaker ones. However, on the basis of GDP per capita, most Southeast Asian economies are below US$1800, as shown in Fig. 13.1C. Singapore is the most developed country in the group, with GDP per capita exceeding US$35,000, as shown in Fig. 13.1D. However, the fiscal performances of most Southeast Asian countries are weak, with more deficits than surpluses. As shown in Fig. 13.2, most economies suffered a big drop after the 2008 world financial crisis. The three better performers include Malaysia, Brunei, and the Philippines. There was much fiscal volatility after 2009, with a few deteriorating performers, including Vietnam and Indonesia. Due obviously to political changes, Myanmar (shown in Fig. 13.2B with the scale on the right hand side) is an exception, as it deteriorated sharply after 2009, but recovered dramatically with a small surplus after 2102. However, many countries have improved their debtto-GDP ratio to below 50%. Only Singapore and Malaysia are faced with a high debt ratio. Between these two domestic economic indicators, the debt-to-GDP ratio can be the stronger indicator, as it reflects determination to lower debts. Indeed, the domestic economic performance will be stronger should these economies work to improve their fiscal deficits. On the external economic front, the Southeast Asian countries are doing fine in both total exports and inward foreign direct investment. Despite the setback in 2008 2 09, exports have been increasing, with a few countries rising rapidly, as Fig. 13.4 shows. The three weaker economies include Myanmar, Laos, and Cambodia, as one can see from Fig. 13.4B. The performance in inward foreign direct investment has not been too favorable, as most are near or below US$10,000 million. Similar to total exports, there has been an increase since 2009, though Myanmar experienced high volatility, as shown in Fig. 13.5B. However, the low level of inward foreign direct investment should not be seen as a weakness, but rather as a potential yet to be discovered by international investors. By examining these few economic indicators, one can conclude that this cluster of Southeast Asian economies can become the new “latecomers” in promoting industrialization and growth, similar to that of the East

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VI CHINA IN ASIA

(A) Fiscal balance 30,000 25,000 20,000 Malaysia

15,000

Brunei

US$ Mil

10,000

Singapore

5000

Thailand

0

Indonesia

–5000

Philippines

–10,000

Vietnam

–15,000 –20,000 –25,000

(B) Fiscal balance 100

50,000 0

0

–50,000

–100

US$ Mil

–100,000 –200 –150,000 –300 –200,000 –400

FIGURE 13.2

Cambodia Lao P.D.R. Myanmar (RHS)

–250,000

–500

–300,000

–600

–350,000

Fiscal balance of ASEAN countries.

European countries. Indeed, by comparing the rise of East Asia in the 1960s and 1970s, and the rise of China since the 1990s, the world economy should realize that aiding a group of small- to medium-sized economies that generate a cluster effect would be better than aiding another large country whose rise would challenge the world economically, ideologically, and militarily. With the development of a cluster of economies, there will be the dual advantage of intraregional competition among this cluster of economies, and interregional competition with similar economies in different world regions. The intention is not for the larger countries to “divide and rule” the smaller countries, but smaller countries can give a wider dispersal in world development, as smaller economies tend to be more pragmatic, and adhere more to the international economic community.

VI CHINA IN ASIA Chinese leaders since 1978 have repeatedly pointed out that China would not be a hegemony in establishing relationships with the rest of the world. Similarly, Chinese leaders have vowed that economic growth would be the prime target in development, and while a reduction in the number of military personnel has been announced, large expenditure has been made in modernizing military technology. Indeed, China’s economic rise has led to

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(A) Debt-to-GDP ratio 70.0 65.0 60.0 55.0 Cambodia

50.0

%

Philippines 45.0

Thailand

40.0

Vietnam

35.0

Malaysia

30.0 25.0 20.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

(B) Debt-to-GDP ratio 250.0

200.0

150.0

Myanmar

%

Lao PDR Singapore

100.0

Indonesia 50.0

0.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

FIGURE 13.3 Debt-to-GDP ratio: ASEAN countries.

numerous studies debating whether China can be number one to rule the world. In favor of China’s growing power, e.g., Jacques (2009) used economic data to show China’s potential, especially after the financial crisis in 2008. Similarly, Chow (2002) argued that China’s successful economic reform has been based on improvements in human capital and hard work, and predicted that with an assumed exponential growth rate of 0.06 for China and 0.0288 for the United States, their GDP would be equalized in 2020, based on the purchasing power parity estimation of 1998. However, there are contrary arguments that China lacks superpower qualities, nearly two-thirds of China’s population can be classified as peasants, foreign companies are responsible for 85% of all high-tech exports, China’s key numbers are regularly omitted, and there are tens of thousands of “mass incidents” each year, rising from 74,000 in 2004 to 87,000 in 2005 (CNBC, August 23, 2011). China’s high growth rates have been due more to the low economic base, the income per capita is still pretty low, and the gap between the “ultra-rich and dirtpoor” is accelerating (Huffpost Business, January 14, 2015). Parfitt (2011) argued that China could not rule the world because China’s interest is in “the appearance of success rather than the substance,” and the lack of innovation can be seen from the fact that the majority of goods produced come from non-Chinese companies. There was a clear strategic difference between Mao and Deng in catching up with the world economy. Mao followed the Soviet Union’s pursuit of economic centralization and propagandized that China would catch up

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VI CHINA IN ASIA

(A) Total exports 600,000 500,000

US$ Mil

400,000

Philippines Singapore

300,000

Thailand Malaysia

200,000

Viet Nam Indonesia

100,000 0

(B) Total exports 14,000 12,000

US$ Mil

10,000 8000

Brunei Cambodia

6000

Lao PDR Myanmar

4000 2000 0

FIGURE 13.4

Total exports of ASEAN countries.

with the economies of Great Britain and the United States within a decade. Deng pleaded China’s low economic development and poverty, and caught the world’s sympathy. However, one feature in China’s communist regime has been the difference between words and acts. For example, the repeated verbal intention that China would not become a hegemony has been met with large increases in military expenditures and modernization. China does have a long-term and ambitious view of international dominance. China has initiated regional multilateral organization in the Asian region. As early as 1996, China formed the Shanghai Five (China, Kazakhstan, Kyrgyzstan, Russia, and Tajikistan), but this was renamed the Shanghai Cooperation Organization (SCO) in 2001. The SCO expanded to include both India and Pakistan in 2015. There are four observer states (Afghanistan, Belarus, Iran, and Mongolia), and six dialogue partners (Armenia, Azerbaijan, Cambodia, Nepal, Sri Lanka, and Turkey). This Eurasian body touches on political, economic, and military matters (“Shanghai Cooperation Organization,” Wikipedia). Politically, China is challenging Russia to show its leadership in the socialist world. With Russia and China, the region will have a closer military relationship, but it is questionable whether the military strength of the SCO could balance that of the North Atlantic Treaty Organization (NATO), because other than Russia, the other members are much weaker in military terms. Economic cooperation would probably be the continuous norm among the members, especially in raw materials and minerals. It is obvious that China would support the SCO with funds and assistance through its “cheque book diplomacy.” In June 2009, at the SCO summit, e.g., China announced the provision of a US$10 billion loan to SCO member states to “shore up the

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(A) Inward FDI 70,000 60,000 50,000

US$ Mil

Philippines 40,000

Indonesia Singapore

30,000

Thailand Malaysia

20,000

Vietnam 10,000 0

(B) Inward FDI 10,000

US$ Mil

1000 Brunei Cambodia

100

Lao PDR Myanmar 10

Timor-Leste

1

FIGURE 13.5 Inward foreign direct investments of ASEAN countries.

struggling economies of its members amid the global financial crisis” (“Shanghai Cooperation Organization,” Wikipedia). Similarly, in the “one belt, one road” initiative unveiled in October 2013, China will provide economic and financial assistance through trade and infrastructure development to friendly countries (See discussion in Section V in the Chapter 9). To support the “one belt, one road” the Asian Infrastructure Investment Bank (AIIB) was established in 2015 to finance the infrastructure investment activities. Although the AIIB has attracted a total of 57 founding members, it is meant to conduct development in infrastructure, and it would duplicate the governance of other international development institutions, such as the World Bank and the Asian Development Bank. Nonetheless, the “one belt, one road, one bank” initiative allows China to establish a regional multilateral body that extends westwards from China to Europe. Among the 57 founding members, Brazil is the only country from South America. Countries on the two sides of the Pacific may not be relevant geographically or geo-politically. China’s “belt, road, bank” (BRB) initiative has received world attention. Comments from some “China-watchers” hold the view that the global power is shifting to Asia, and to China in particular (See, e.g., The Globe and Mail, April 1, 2015). Others would argue that China is handing out “free cash” to countries which are prepared to kowtow to China. Building roads and railways across Central Asia and West Asia and so on would involve not only funds, but also time, political considerations, material supplies, and geological estimations, in addition

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to technology, human capital, and management. Infrastructure constructions will take years, if not decades, to complete, and may not show short-term results. The work of the AIIB is yet to be tested over time, as one possibility is that the AIIB could merely serve as another financial institution in China that engages in financial and speculative dealings that boosts the financial sector, similar to the establishment of other “shadow banks” in China. There can be constraints in the supply of materials for land and ocean projects. For example, although steel production may be exported from China, the funds for purchasing imports may have to come from the host country, which would face reserve constraints. If China was to provide the funding for the purchase of imported materials, the question then would be whether other conditions, such as the use of land rights around railway lines, would be attached. Similarly, there could be diplomatic friction in the negotiations for the projects about to what extent China would “interfere” in the internal affairs and resource deployment of the host country. Experience in China’s Railway Group in Thailand and in Indonesia, e.g., has shown the difficulty in the negotiation and usage rights in the funding of China’s railway projects (South China Morning Post, April 7, and 10, 2016). In China’s reform, the strategy of “bringing in” is meant to import resources, human capital, knowledge, institutions and practices, technology, and management that serve the economic reform process. For example, the organization of the Olympics and the World Expo provided China with an opportunity to learn how the outside world conducted international events. By joining the WTO, China needs to adhere to international guidelines in trade, and that in turn imposes the way external trade and economic openness has to be conducted domestically in China. The “going out” strategy implies, e.g., the use of Chinese outward investment and funds in other developing countries. There is, however, debate as to the essence of the strategy, if funds used were to secure other materials in short supply in China, especially when the outward investments were from state-owned or statecontrolled funds. While the BRB initiative requires blocks of funds, material inputs, time, and structural changes in the affected countries, the TPP trade agreement on the other hand provides opportunities in trade and investment that would benefit the member countries directly as their exports expand. As the TPP agreement would not be involved with infrastructure development, which should actually be left to the decision of indigenous governments, the advantage of the TPP agreement could easily be materialized once member countries increased their industrial and manufacturing outputs. The TPP does provide security in market access among members, its participation in investment and export is voluntarily and depends on the economic strength of member countries. In turn, TPP members could easily expand their exports and attract inward investment. On noneconomic fronts, a number of conflicts with other smaller Asian neighbors in territorial and ocean disputes are involved. China’s ideological difference is certainly the cause of not making compromises with Asian neighbors. While it has abundant arable land for development, China probably followed the expansionist policy of the Soviet Union in annexing territories. It is clear that no Asian neighbors, including Japan and the United States, would engage in war with China. But, to provide a reason for military expenditure and modernization, there could be the need for a “war preparation” mentality. One propaganda reason that China held on to claim islands in the East China Sea and South China Sea was China’s possession in “historical” times. It is also true that other Asian countries and territories were once China’s territories in history. For example, China had dominated Vietnam over four historic periods of 111 BC to 30 AD, 43 2 544, 602 2 938, and 1407 2 27 (“History of Vietnam,” Wikipedia). China’s Han emperor conquered the northern part of the Korean peninsula in 108 BC, and administered the area around modern Pyongyang for nearly 400 years (The Economist, April 12, 2013). Mongolia (which used to be called Outer Mongolia) was ruled under the Qing dynasty (1635 2 1912) (“Mongolia under Qing Rule,” Wikipedia). Vladivostok (known as Haishenwai in Chinese), now the home port of Russia’s Pacific fleet and the largest Russian port on the Pacific Ocean, was acquired by Russia in the Treaty of Beijing in 1860 as the Qing dynasty failed to defend the region after being defeated in the Second Opium War by Great Britain in the same year (“Vladivostok,” and “Opium Wars,” Wikipedia). Indeed, many Chinese artifacts and historic treasures of previous dynasties are found in European museums. The use of “history” has politically been exploited by China in an attempt to convince the international community in order to claim territories. The history of the People’s Republic of China dates back only to 1949, when the revolutionary communist regime took over from the Nationalist government (Kuomingtang) which fled to Taiwan. The Qing dynasty was overthrown by Sun Yat-sen, who founded the Republic of China in 1912. The revolutionary communist regime in China was not a continuation of a former regime. How far in history that post1949 China counted on could be an international law and legitimacy debate. Should today’s China legitimately be accountable for all the deeds that the former, already extinguished, Chinese rulers, emperors, and dynasties had committed? What legality does China hold in dealings with the deeds conducted by previous rulers before 1949? The communist regime was not part of the signatories in the various treaties conducted in the Qing

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Dynasty. With the communist revolution taking power in 1949, the territory of China could only contain the land and ocean rights that existed in 1949. Would it be more civilized for post-1949 China to move forward and make the best of peaceful coexistence and cooperation with other Asian neighbors, or dig up all pre-1949 wounds and establish conflicts with other neighbors, or whoever had done wrong to rulers and emperors in previous Chinese dynasties? Or are these simply instruments and scapegoats that are used by today’s China for political manipulation to gain international recognition and ambition so as to compete with other world powers, to bully other smaller countries in the region, or to extend its aggressive communist ideology? The difference between conflict and peace is that conflicts produce “absolute” outcomes, while peace allows cooperation for mutual benefits. The strategy should be mutual recognition and respect in international relations. Cooperation that yields “relative” outcomes is preferred to confrontation that yields “absolute” outcomes. If the question relates to the hidden and potential resources of the territories, can the resources be developed and explored to mutual advantage, so that all countries concerned could cooperate and share the advantages? After all, China is already the largest country in the Asian region. One territorial dispute with Japan and Taiwan (Chinese Taipei) involves a group of five uninhabited islands in the East China Sea located east of China, northeast of Taiwan, but west of Okinawa Island and southwest of the Ryukyu Islands. These islands have been called differently: Diaoyutai Islands in China, Senkaku Islands in Japan, but are otherwise known as the Pinnacle Islands. China has claimed both the discovery and ownership of the islands as early as the 14th century. China and Taiwan regarded the islands as part of the Yilan County of Taiwan. Japan claimed its ownership of the islands from 1895 until the end of World War II, when the US administered the islands from 1945 to 1972. Under the Okinawa Reversion Agreement between the United States and Japan, the islands were returned to Japan. Japan regarded the islands as part of the Okinawa Prefecture. Prior to the transfer of administrative control from the United States to Japan in 1971, there was a report in 1968 of the discovery of potential undersea oil reserves. China, in November 2015, declared unilaterally that the East China Sea Air Defense Identification Zone (ADIZ) extended air space to include the Diaoyu Islands or the Senkaku Islands, escalating the dispute between China and Japan and the United States (The Diplomat, October 13, 2015). By distance, these islands are closest to Taiwan. While it may not worth fighting for a few lone islands that are uninhabitable, and probably not sufficiently large for military purposes, the focus of attention could be the large undersea oil reserves. Since the conflict concerned a valuable economic resource, the problem should be dealt with using economic tools, but ideological and political differences could prolong the conflict. Although the exploration involves a huge amount of capital and technology, the long-term lower cost oil supply would benefit all partners in the joint exploration. Peaceful collaboration in resource exploration is definitely more preferable than regional conflicts. China has been making unfriendly moves in the South China Sea, involving territorial disputes with the Philippines, Indonesia, Vietnam, Brunei, and Malaysia. Located south of the Hainan Island of China, southwest of Taiwan, east of Vietnam, west of the Philippines, east of the Malay Peninsula, and north of Borneo, the economic asset is that one-third of the world’s shipping sails through the South China Sea, and it is believed to have huge oil and gas reserves hidden beneath its seabed. The conflicts in the South China Sea involve several groups of islands that are nearer to the Philippines, Indonesia, and Vietnam than to the southern coast of China (Storey, 2015). The South China Sea, which has been labeled differently by surrounding countries in different historical time periods, contains over 250 small islands, shoals, and reefs that form into archipelagos which have no indigenous people. The Pratas Islands are closest to China, as these islands are located southwest of Taiwan and east of Hainan Island. The Scarborough Shoal is right outside the west coast of the Philippines. The largest group of the Spratly Islands are located southwest of the Philippines but north of Brunei, Malaysia, and Indonesia. The Paracels Islands are also located nearer to Vietnam than to China. The Subi Reef, Spratlys, and Fiery Cross Reefs are islands lying between Indonesia, Vietnam, and the Philippines. The most southern group of islands include Natuna and Anambas Islands that are located south of Vietnam, but between the water of east and west Malaysia. Hence, the multiple territorial claims that involve China and other ASEAN nations include the Paracel Islands between China, Taiwan, and Vietnam. The claims for the Spratly Islands involve China, Taiwan, Brunei, Vietnam, Malaysia, and the Philippines. The Scarborough Shoal has been in dispute between China, Taiwan, and the Philippines. The dispute on the southernmost Natuna Islands involves China, Taiwan, and Indonesia. Naval clashes were reported in the Paracel Islands in 1974, and in the Spratly Islands in 1988, between China and Vietnam. China claimed “historically” that all these islands were in Chinese territorial waters. Distance-wise, these islands are basically located on the doorsteps of the three Southeast Asia countries. Another economic issue is fishing rights in the South China Sea, as Chinese fishing vessels have been confronted about illegal fishing in

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the South China Sea, as well as in the territories of other countries, such as South Korea and Argentina. Strategically, it could have military value as it stretches from the Malacca Straits in the southwest to the Strait of Taiwan in the northeast. While ASEAN member countries have been keen to take up a multilateral approach to resolve the disputes and overlapping claims to avoid conflicts, China preferred to take a bilateral approach. ASEAN members feel disadvantaged in bilateral negotiations with the much larger China, and bilateral talks may not be effective when it comes to competing claims (The Diplomat, March 7, 2014; AFP, October 9, 2014; The Independent, March, 16, 2016; and South China Morning Post, May 28, 2014, March 20, and 25, 2016). The ASEAN member countries surely are aware of China’s assertive behavior in the South China Sea, which caught world attention when, in July 2010, the United States called for China to resolve the territorial dispute, but China warned the United States to “keep out of the issue.” As the “police of the world,” the United States has regularly engaged in naval exercises in the area, and on August 18, 2010, released a statement opposing the use of force in resolving the dispute. The issue of militarizing the South China Sea has been raised since 2012 as the US Navy has reportedly disclosed land reclamation conducted by China in a chain of islands and reefs. Within a short time, China has built airbases and installed powerful radar and missile launches. These aggressive attempts to control the South China Sea have raised tensions with Asian neighbors (New York Times, February 29, 2016; The Washington Post, March 16, 2016; BBC News, March 18, 2016; and Reuters, March 19, 2016). In mid-2015, the United States spotted through satellite images that China was conducting land reclamation on Fiery Cross Reef. Tensions grew in the region, especially between the United States and China. The artificial islands were thought to have been built for military purposes, though when pressured, China said that the purpose was aimed at “better weather forecasts” (Osawa, 2013) (South China Morning Post, April 17, April 21, May 30, and June 21, 2015). With the typical communist ideological attitude, the Chinese leaders retorted that “the US not China is the nation militarizing the South China Sea . . . it was the US sending the most advanced aircraft and military vessels to the South China Sea” (South China Morning Post, March 4, 2016; and US News; March 11, 2016). There is surely a difference between sending vessels to the region and building up airbases. In an interview during the National People’s Congress (NPC) meeting in March 2016, Chinese Foreign Minister Wang Yi disclosed that “China will build essential infrastructure to better protect its growing offshore interests.” Wang stressed that “China’s buildup of defense facilities on its own islands and reefs is fully within its international rights and that the country is not militarizing the sea.” The build-up in the Scarborough Shoal is seen as a Chinese plan to construct more supply bases around the world after setting up the first naval supply depot in Dijbouti (China Daily Hong Kong Edition; March 9, 2016; and South China Morning Post, March 9, 2016). According to published materials, the origin of the conflict in the South China Sea dates back to 1947, when the Nationalist government (KMT) of the Republic of China drew the “eleven-dash lines” after taking control of some islands in the South China Sea that had been occupied by Japan during the Second World War. After the KMT fled to Taiwan in 1949, the communist regime in Beijing declared itself to be the sole legitimate representative of the maritime claims in the South China Sea. To make a gesture of friendship to North Vietnam, two “dash lines” that bypassed the Gulf of Tonkin were removed in early 1950. The consequent “nine-dash lines” encircle about 90% of the contested waters, as the lines run as far out as 2000 km from mainland China to about a few hundred kilometers away from the Philippines, Malaysia, and Vietnam. By using the “history” argument, Beijing maintained the area covered in the “dash lines” as “historical maritime rights” (South China Morning Post, May 25, July 10, and July 12, 2016). In January 2013, the Philippines government took the maritime claim dispute to the Permanent Court of Arbitration (PCA) in The Hague, Netherlands (“The Republic of Philippines vs The People’s Republic of China,” Permanent Court of Arbitration, Netherlands, http://www.pcacases.com/web/view/7; and “South China Sea,” Wikipedia.). The PCA is under the aegis of the United Nations Convention on the law of the Sea (UNCLOS). The Philippines argued that the lines exceeded the limits of the maritime entitlements permitted under UNCLOS, and at the same time sought clarification on the definition of the disputed areas as to whether they are islands, low-tide coral outcrops, or submerged banks, in order to determine the entitlement to the territorial waters in question. However, UNCLOS does not deal with sovereignty questions that the Philippines authority did not raise. Although communist China is also a signatory to UNCLOS, Beijing’s strategy, as reported, was to remain ambiguous and intentionally not define the legality of the “nine-dash lines,” as that could blur the maritime boundary. Without a clear boundary, Beijing can take various advantages, including demanding economic rights, and control the island and waters, without making obligations to international law. The PCA eventually delivered its verdict on the friction in the South China Sea on July 12, 2016 (“The South China Sea Arbitration (The Republic of the Philippines vs The People’s Republic of China),” Press Release, Permanent Court of Arbitration, The Hague, the Netherlands, July 12, 2016). The verdict was divided into five decision items. It began with the

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concern on the “Historic Rights and the ‘Nine-Dash Line’” and concluded that “. . . to the extent China had historic rights to resources in the waters of the South China Sea, such rights were extinguished to the extent that they were incompatible with the exclusive economic zones provided for in the Convention. . ., there was no evidence that China had historically exercised exclusive control over the waters or their resources. . ..” In the concern on “Status of Features,” the Tribunal concluded that “. . . none of the features claimed by China was capable of generating an exclusive economic zone, . . . it could declare that certain sea areas are within the exclusive economic zone of the Philippines, because those areas are not overlapped by any possible entitlement of China.” On the “Lawfulness of Chinese Actions,” the Tribunal held that “Chinese law enforcement vessels had unlawfully created a serious risk of collision when they physically obstructed Philippines vessels.” On the concern over “Harm to Marine Environment,” the Tribunal found that “Chinese authorities were aware that Chinese fishermen have harvested endangered sea turtles, coral, and giant clams on a substantial scale in the South China Sea . . ., and had not fulfilled their obligations to stop such activities.” Lastly, the Tribunal concluded on the “Aggravation of Dispute” that “China’s recent large-scale land reclamation and construction of artificial islands was incompatible with the obligations on a State during dispute resolution proceedings, insofar as China has inflicted irreparable harm to the marine environment, built large artificial islands in the Philippines’ exclusive economic zone, and destroyed evidence of the natural condition of features in the South China Sea that formed part of the parties’ dispute.” While the international community and neighboring ASEAN countries were showing support to the decisions of the Tribunal, and looking for a more compromising and self-restraining solution to avoid direct friction with China (Nguyen, 2016), China unilaterally defied the PCA’s decisions and recommendations, arguing that China would not accept or accommodate the decisions of the Tribunal. Instead, China already pointed out that the United States cannot uproot China, ignored the international community, and went further by building aircraft hangers on disputed islands in South China Sea, as reported by a US think tank in August 2016 (South China Morning Post, April 7, July 12, and 25, and August 9, 2016). With growing military spending, it would be China’s intention to militarize the South China Sea for its strategic ambition. With a weaker US position in the Asia 2 Pacific region on the one hand, divided ASEAN members, and a change of leadership in the Philippines in 2016, China is asserting its gigantic size and may not respect its Southeast Asian neighbors and obligation to international law. ASEAN members have no match to China’s growing military power. Other United States 2 China analysts would argue that the United States may have to balance the concerns of the ASEAN members with the bilateral interest between China and the United States. However, a closer US 2 ASEAN relationship would definitely be rewarding in maintaining peace in the region. The South China Sea incident should reflect back to the original intention of the “Nixon 2 Kissinger initiative” in the early 1970s by incorporating China into the United Nations, the conclusion could be that communist China would unilaterally defy international law and obligations. With the rise of China, Southeast Asia in principle should be the first region to benefit. However, China’s unilateral action in the South China Sea has brought political and military imbalances in the region, threatening regional stability considerably. Indeed, China’s unsteady policy in Southeast Asia has resulted in differences in the approach to China by the ASEAN members, with Indonesia and Vietnam having disputes with China, while others may prefer to kowtow to China for potential economic advantages. The test will be whether the ASEAN members will stand as one single market with one voice and a united regional body, or become fragmented and fall into China’s hands. If stability among the countries in the ASEAN region cannot be maintained, the economic cost could be high and development may be delayed. When compared to the influence between Japan and China in the Asia region, one can immediately see that Japan has been aiding the economic development of other Asian countries. Economies in East Asia and Southeast Asia have benefitted through growth and increase in trade with Japan. China’s rise provided selective assistance to its Asian neighbors, but it also brought with it military expansion and threats, as the international community has clearly observed with China’s action in the South China Sea incident. There is, thus, a vast difference in the economic influence between Japan and China in the Asian region.

VII CONCLUSION The progress in economic development can be “relative” within economies and across borders. Whether a country endowed with natural resources can be developed or not depends on the execution of appropriate

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policies and ideologies. Indeed, experience shows that countries endowed with natural resources can remain underdeveloped if ineffective policies are adopted. Similarly, the adoption of suitable economic policies can aid economic progress, even if a country lacks natural resources. The appropriateness of economic policies can be seen from an economy’s overall competitiveness. An economy can become competitive, but can also become uncompetitive when compared to neighboring and other economies. This is due to the fact that economic resources, especially financial capital, are mobile across countries, territories, and regions. The competitive advantage that helps an economy to progress today may change tomorrow, as there are others making improvements in their competitiveness. Developing countries that can improve their domestic factors also perform better in external factors. The lesson is that foreign capital is always mobile, and often ends up in countries that perform strongly in domestic conditions. Similarly, an economy faced with deterioration in domestic conditions will likely experience an outflow of its capital resources to more attractive destinations. Thus, inappropriate domestic policies could end up driving away capital. The Chinese economy has been made successful mainly by the expectation from the rest of the world that reduction in poverty in China would help to improve people’s livelihood, that a peaceful rise in the Chinese economy would be used as a showcase to other developing countries, and that a more developed China economy would contribute to the development of the world economy. Deng Xiaoping’s economic reform in 1978 that denounced poverty in China did encourage investment to China. Foreign investments made no secret about the benefit of a wealthier China as it became the world’s next biggest consumer market. Few would have estimated the cost of a powerful Chinese economy to the international community. With roughly a fifth of the world’s population, advances in the Chinese economy would not only provide a huge consumer market and a production site, but also consume much of the world’s resources. A powerful but politically uncooperative China could pose challenges, at least to the Asian region, as the other smaller Asian countries could not have a military force parallel to that of China. In economic jargon, the Chinese economy has “absolute advantage” over a number of neighboring Asian countries. Armed with large amounts of production factors, most Asian economies were in the position of “absolute disadvantage.” Armed with political and ideological differences with all major Asian economies, China posed a bigger “threat” than Japan or the United States. Alternatively put, while Japan’s involvement in Asia was in the economics arena of investment, production, and industrialization, China’s involvement in Asia would include political, ideological, and military considerations. Asian countries would have to stay alert in their economic development. Avoiding instability within and among ASEAN countries had become a prerequisite in ensuring that there would not be any “capital flight.” Facing up to challenges from China required speedy improvements in “supply-side” factors, including improvements in infrastructure, business-friendly policies and ethical behavior, eradication of corruption and cronyism, nurturing human capital, and establishing a “system-driven” socioeconomic framework. In other words, Asian economies had to nurture new “comparative advantages.” By improving their domestic factors and conditions, Asian countries could stay competitive “intraregionally” so that they could be more attractive to China, Japan, and other investors in the region, and “interregionally” so as to attract investments from Europe, North America, and other capital-rich regions. Further economic integration and policy cooperation within ASEAN countries would help to strengthen their “intraregional” power. By posting itself as a cohesive region, ASEAN countries could present and project a large consumer market for other investors, and resource diversity within ASEAN member countries should ensure diversity in production and industrial development. Balancing its Asian relationship with China, Japan, South Korea, and Australia, and international relationships with North America and Europe, ASEAN could find their own competitive advantages. Due to the economic similarities among ASEAN countries, economic integration could extend to “supply-side” factors, including the exchange of “good practice” in development. The economic development of the ASEAN region has its own special features and when developed properly, ASEAN can be the “latecomer” to China in world development. Between the external factors and indigenous factors, ASEAN countries will have to compete with China in the external factors, while improvements in indigenous factors should be in the hands of the ASEAN countries themselves. Hence, it would be fruitful to make indigenous improvements so as to transform and strengthen their economies. The improvement in their domestic factors will in turn aid them in improving their external factors. This should be ASEAN’s eventual outcome in the race to improve their competitiveness “intraregionally and interregionally.” While ASEAN member countries should integrate further, it would be interesting to observe the development of the China 2 ASEAN relationship. Due to ideological differences and the expanding Chinese power in the region, it is likely that China and ASEAN will have different development strategies. For example, will China

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prefer to see an integrated ASEAN? Or would it be to China’s advantage to “divide and rule” the ASEAN members. ASEAN members would be in a “prisoner’s dilemma” situation of choosing between further cooperating and integrating within ASEAN, or taking advantage from the economic gains by getting closer to China. The decision on the choice, however, should be in the hands of ASEAN members, as they need to be more open to ASEAN activities and at the same time avoid the economic temptation from China, bearing in mind that China’s provision of economic resources and gains would carry a political cost. A balancing strategy would be to weight the influence of China against the need to get close to an external power, typically the United States and Japan. Like Japan in the 1970s, when Japan invested massively in other East and Southeast Asian economies, China is likely to duplicate by investing in Southeast Asian countries, typically through the BRB initiative. ASEAN members will have to steer between economic gains and political influences. If carefully and strategically placed between BRB and TPP, ASEAN members could be in an excellent position to “make the best of both worlds.”

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