Global Policy Forum

By Phar Kim Beng

At the recent Eighth Summit in Phnom Penh, the Association of Southeast Asian Nations and China agreed to establish the ASEAN-China Free Trade Agreement by 2015. Upon its completion, the agreement will open up a market of 1.7 billion consumers with a combined gross domestic product of US$1.5 trillion to $2 trillion and two-way trade of $1.2 trillion.

This is a clearest signal yet that the bandwagon dynamic has begun to operate in ASEAN-China relations. Implicit in the concept of bandwagoning is that a group of smaller countries will attempt to align itself with an emergent power.

This is the case because ASEAN can no longer depend on Japan for an economic lifeline. Japan has been firing blanks for almost a decade. Deflation and non-performing loans amounting to $1 trillion have been plaguing Japan. Despite efforts by Japan's economic czar Keizo Takenaka to reform the economy, the signs do not appear promising.

Experience has also shown that Southeast Asia cannot rely on the International Monetary Fund and the World Bank for handouts. Both institutions are based in the United States. They do not want to be accused of creating a "moral hazard" that would stonewall reforms in Southeast Asia. Such accusations would make the international bodies vulnerable to scathing criticism from the US Congress that is now under the control of the Republicans.

To be sure, foreign direct investments (FDI) into Southeast Asia have been declining dramatically. In this context, it is easy to understand why ASEAN is now trying to endear itself to China. In 2000, Southeast Asia received just $10 billion, a 37 percent decline from the $16 billion in 1999. The FDI figure was $27 billion in 1996 and $19 billion in 1998.

It does not appear that this diminishment of FDI will abate any time soon. In its 2001 projection released by the Economist Intelligence Unit (EIU), the biggest recipients of FDI for the years 2001-05 were forecast to be the United States, the United Kingdom and Germany. Each of these countries was expected to receive $236.2 billion, $82.5 billion and $68.9 billion respectively.

Other economies slated to receive a lion's share of the FDI for the next five years were: China, France, the Netherlands, Belgium, Canada, Hong Kong and Brazil. Thus, of the 10 economies on the list, only two were in Asia. None in Southeast Asia, however. And, given Hong Kong's role as the de facto entrepot of China, the possibility of a statistical double count is high. Hence, China is in effect the lone beneficiary of the investment flows.

While the growth of China should be a boon to the rest of the world in the long run, it can also be a cause for concern to Southeast Asia in the short and middle terms. This is because there is a limited amount of FDI each year. In 2000, total global FDI reached $1.1 trillion. In 2001, it peaked at $800 billion due to a slowdown in the United States. And up to 70 percent of the FDI was bound to concentrate narrowly in rich countries where the financial returns were steadier and higher.

Therefore, the developing world was left to battle for the remaining 30 percent of the FDI. When one considers the fact that China is now expected to scalp 6.5 percent of the total FDI for the next five years, the fight for the leftovers is even more severe. That is to say, 10 Southeast Asian countries have to compete for the remaining 23.5 percent of the FDI left by China - an average of little more than 2 percent for each country.

As such, in competing for a major share of FDI, Southeast Asia cannot buck the need for necessary reforms. As one commentator affirmed, globalization has now turned the world into a beauty contest where the most attractive country or region will stand to gain the most from the flows of funds.

Indeed, leaders of Southeast Asia have to satisfy the expectations of international investors in as many areas as possible. Most notably, they have to firm up the region's business environment where transparency, accountability and fair competition become entrenched. There has to be a concerted effort to address the issue of political violence and terrorism too, as occasioned by the Kuta bombing on October 12.

Barring such efforts, money will continue to make its way into neighboring and other regions to the detriment of Southeast Asia. Money, as many international investors like to point out, is a great coward: It only goes to places where returns can be guaranteed.

Right now, unless ASEAN makes Southeast Asia better and safer than China, the flows of future FDI will continue to go northward.

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