ASEAN's Future: Responsibility of Thailand and the Expectations for Myanmar

Date February 27, 2013 Surin PITSUWAN(Professor Emeritus, Thammasat University/Former Secretary-General of the Association of Southeast Asian Nations (ASEAN)) NISHIMURA Hidetoshi(Executive Director of the Economic Research Institute for ASEAN and East Asia (ERIA)) KASUGAHARA Daiki(Director, Asia and Pacific Division, Ministry of Economy, Trade and Industry (METI))

Summary

Surin PITSUWAN

ASEAN (Association of Southeast Asian Nations) and East Asia need champions from outside of the formal structure of leadership, much like the European Union (EU) did around the time of its formation. Then French Foreign Minister Robert Schumann and Jean Monet drummed up support for the concept of the European Common Market, even though they didn't hold official positions. In fact, they were more effective from outside of the official leadership structure. The vision of the EU was and still is that of a non-partisan enterprise, requiring support from across the spectrum of European political ideologies. ASEAN needs such personalities, including from Japan, in order to enjoy more success in East Asian integration.

ASEAN has started something extremely vital and important, which is the notion of regional integration between small and medium-sized countries. Although they are diverse among themselves, these countries are aware of the need to work together in order to compete with the rest of the world. There are four pillars of the ASEAN economic community, of which one is integration. This is very difficult to achieve because of the huge disparity between the rich and the poor which exists in the ASEAN area. In order to overcome this, there is a need for foreign direct investment (FDI) and the encouragement and advice of countries like Japan. The second pillar is competitiveness. ASEAN countries must find a way to be competitive economically, which will require human resource development, technology transfer, investment in research and development (R&D), and effective training of work forces. Help, support, and advice from other countries are also essential in aiding this. The third pillar regards equity. Economic growth has to be inclusive and equitably distributed, as without this tension, instability and conflict are sure to follow. Finally, the fourth pillar is the need to be integrated into the global marketplace seamlessly. To achieve all of this, it is essential to recognize the importance of ASEAN integration from a wider perspective than that of only the region itself. With this in mind, five free trade agreements (FTAs) have been established between ASEAN and neighboring countries. The mission henceforth is to perfect and improve upon development in the ASEAN region in order to compete with and complement the neighboring economies, along with advancing the ASEAN Regional Comprehensive Economic Partnership (RCEP).

Both Japan and Thailand have been undergoing times of uncertainty recently, with a frequent changing of prime ministers. On top of this, Japan has suffered from the devastating economic and psychological effects of the 2011 Great East Japan Earthquake. Likewise, Thailand suffered similar effects from the terrible floods at the end of 2011. The noteworthy issue is that the damage caused in both countries had a negative effect both on mutual interests and industries, as well as on the rest of the world. This is due to the existing level of integration and interdependence. Against this backdrop, it is important to realize that integration exposes economies to both positive and negative effects on each other.

There has been a recent new wave of Japanese investment in Southeast Asia, resulting from over four decades of engagement. During the first wave, there were student demonstrations in all of the capital cities in the area, as people weren't sure of Japan's intentions. From around 1977 and onward, Japan and Southeast Asia have been enjoying close and positive cooperation and engagement regarding investment. In this respect, the question must be raised about Thailand's role and responsibility in this new and emerging ASEAN marketplace covering over 600 million people. ASEAN is, in fact, Thailand's intellectual property as it was conceived in Thailand and proposed by a Thai foreign minister in 1967. Thailand, having never been colonized, was standing alone in Southeast Asia, and it was decided that it would be beneficial to create something which would be suitable specifically for the Southeast Asian region. Thailand is also situated in the center of the ASEAN region. In terms of infrastructure, Thailand was probably also the best equipped of the ASEAN nations. Furthermore, its industrial base was the most developed in the region. Therefore, Thailand is expected to fulfill a special role in relation to ASEAN. However, Thailand has not been without its own problems over the last decade. Uncertainty, discontinuity, conflicts, and tension have all plagued the nation, and it is currently going through its own process of consolidation and revitalization.

Thailand shares a 2,400-kilometer border with Myanmar, which allows for a unique opportunity to help the latter develop. Myanmar also has 50 million potential consumers, tremendous natural resources, and a good, strategic location between China and India. It is situated in a neighborhood of three billion people and borders the Indian Ocean and the Malacca Straits, both of which are becoming very significant strategic areas for Japan, China, and Korea. There is much enthusiasm about Myanmar at the moment, and its government is determined to become the chair of ASEAN next year. Such ambition is of great importance psychologically, politically, and diplomatically for the country. The ASEAN Economic Community (AEC) is the goal of ASEAN regional economic integration for 2015, and, in the same year, Myanmar is expected to hold its own presidential elections. Those two deadlines act as a source of pressure on Myanmar, which is expected to synergize with the dynamism of ASEAN.

There are three initiatives presently in Myanmar. One initiative is led by Japan, which involves the development of the Thilawa Special Economic Zone. Investment in this project is around $5 billion, and a study on its feasibility will be completed in March 2013. This zone would be represented as a 200-hectare industrial park. However, it is still under planning, and only 13% of the 50 million potential customers in Myanmar currently have access to electricity, which acts as a limiting factor on development. The second initiative is a$27 billion investment led by China, which involves the building of gas pipelines between Yunnan province and northwest Myanmar to serve the needs of southwest China. The third initiative involves the development of a special economic zone led by Thailand, with investment estimated at approximately $60 billion. This initiative is also still at the planning stage. With this in mind, the government of Myanmar needs something solid to show to its public. Joining and attempting to chair ASEAN are acts which attempt to do this, but which will also undoubtedly come with pressure in 2014 and 2015. Regarding Thailand's contribution to the development of Myanmar, although there are initiatives being planned, there is a sense of pressure associated with finding a way to help move this forward. In response to this, Thailand has come up with a model by using Mexico as an example. When the North American Free Trade Agreement (NAFTA) came into being, industries and factories were established along the United States-Mexico border in the states of California, Arizona, and Texas. The reason for this was because mutual factors such as a market and logistics existed, while other elements such as a labor force were present in Mexico along with technology present in the United States. It made sense to cooperate and trade with each other for mutual benefit by making use of the existing potential. Mexico has a Border Industrialization Program (BIP), which the governments and private sectors of Japan, Thailand, and Myanmar could possibly consider using as a model in East Asia. The 2,400-kilometer border between Thailand and Myanmar, at its closest point, is also only 150 kilometers from the Bangkok metropolitan area. The Bangkok metropolitan area is also only 200 kilometers from the eastern seaboard of Thailand, where many Japanese companies and factories are already based. Therefore, there is potential for the development of a BIP between Myanmar and Thailand. Industrial estates could be established 10 kilometers inside the 2,400-km border zone in the Myanmar side. This partnership would also mean that industrial products would not necessarily have to be shipped out west, where ports currently do not exist. Instead, they could be sent out through Thailand's eastern seaboard to the rest of the world, or shipped down to the ports at Thailand's southern peninsula and out to countries such as Singapore and Malaysia. A Thailand-Myanmar BIP could potentially allow for the relatively quick development of employment, income, purchasing power, and the export sector in Myanmar. It is also understood that Japanese businesses in Thailand are also attracted to the notion of a Thailand-Myanmar BIP. The government of Myanmar has also expressed that the creation of jobs and the return of its migrant workers currently living in Thailand, Malaysia, and Singapore are of high priority. Whereas it is unlikely that migrant workers will return to Myanmar in large numbers, it is very likely that a BIP will rapidly accelerate this process. The 600 million people of the ASEAN region are generally growing into the middle class, and have their own lifestyle, expectations, and consumption patterns. They also expect investment and industrialization to continue to be supported largely by Japan. However, in 2011, for the first time ever, ASEAN nations as a whole represented the largest proportion of FDI in the ASEAN region, which amounted to$114 billion. The second-largest source of FDI was from the European Union, which consists of 27 countries. Japan represented the third-highest source, meaning that it is the largest single-country investor in the ASEAN region. Southeast Asian and ASEAN countries expect quality investment from Japan. Over the past four decades, ASEAN countries have seen an improvement in the quality of their industrialization. There have been significant improvements in the accompanying labor force, education, human resource development, and management skills. Thailand spends about 0.18% of its gross domestic product (GDP) on R&D and innovation, which is significantly below what it should be investing. Investment in R&D is greatly needed in ASEAN countries as Japan, India, and Korea spend 3.44%, 0.76%, and 3.21% of their GDP, respectively, on R&D. Other Southeast Asian countries spend significantly less in comparison, with Malaysia, Vietnam, and the Philippines spending 0.63%, 0.19%, and 0.11% of their GDP, respectively. Countries which are aspiring to be in the middle income class brackets cannot sustain themselves without having a solid R&D, design, innovation and human resource development foundation. Without this, there is a risk of being caught in a middle income trap.

Of all 10 ASEAN countries, Singapore and Brunei are the only two which could be classed as being in the higher income bracket. Malaysia is likely to follow in their footsteps, although the rest of the ASEAN nations are at risk of being caught in this middle income trap. If this happens, there won't be quality, equitable development with seamless integration into the global community. If technology transfer is not ready to advance at this stage due to the lack of protection of intellectual property measures, at the very least, those in human resource development, management, and administration should be part of the innovation and the R&D process. This is something which only Japan can currently conduct successfully in East Asia. Japan has the power and potential to help ASEAN countries improve their own level of competitiveness in the future through innovation and R&D.

NISHIMURA Hidetoshi

Dr. Pitsuwan's speech closely linked to the mission of the ASEAN area. Two issues will now be presented regarding Dr. Pitsuwan. The first issue is in regard to the Economic Research Institute for ASEAN and East Asia (ERIA). ERIA was established in January 2007 based on a proposal by Japan Prime Minister Shinzo Abe. At that time, ASEAN leaders decided to accelerate the completion of an ASEAN economic community by moving the target year from 2020 to 2015. In November 2007, ASEAN leaders agreed on the four pillars of the ASEAN economic community, which formed a basis for steps toward this target. Although this represented a plan which wasn't directly linked with Japan's proposal, all of the measures related to an ASEAN economic community materialized under Dr. Pitsuwan. This, in turn, led to the creation of the Comprehensive Asia Development Plan (CADP) and the Master Plan on ASEAN Connectivity.

The CADP has great significance and is based on the concept of second unbundling, which refers to a more sophisticated production process and division of labor in the ASEAN region due to the advancement of the global supply chain revolution. Previously, only the East Asian region including Japan had established a sophisticated production industry. The idea of using the NAFTA as a model for a Thailand-Myanmar BIP is also closely linked to second unbundling. BIP is a type of global supply chain production network which seems to be very suitable for the early stages of developing Myanmar's economy. Upon the establishment and development of such BIP, it must evolve so that it can join with the production network of the East Asian region.

The second issue concerns why India needs ASEAN. It seems clear that if India does not take advantage of the power of ASEAN, it will not be able to overcome the scarcity of developments in its own economy. In order for India to cope with the potential decrease in its GDP growth rate, it must connect with ASEAN and Myanmar. Myanmar will inevitably be of importance to the development of not only India's economy but also ASEAN nations as a whole. Japan now has a joint project with the government of Myanmar, and it is preparing the Myanmar Comprehensive Development Vision (MCDV). Under the MCDV, the Mekong-India Economic Corridor (MIEC) project has also been established. Furthermore, at the last ASEAN-U.S. summit, the U.S. president clearly stated that the MIEC is of interest to the United States. Finally, the occurrence of natural disasters is closely linked to the issue of resilience. The second unbundling type of network allows for the immediate recovery of production, and it is surely the strongest kind of production network which currently exists in the East Asian region.

Q1: R&D along with innovation was discussed in today's presentation. Could you please provide more details on the innovation to which you referred?

Surin PITSUWAN
Based on statistics provided by ERIA, the picture is rather uneven among the countries of East Asia. In the United States in 2010, there were a total of 456,000 applications for intellectual property rights. In the EU, Australia, and China, there were 133,000, 23,000, and 314,000 applications, respectively. In the Southeast Asian region, Malaysia had 5,700 applications and the Philippines had 2,900. Interestingly, the Philippines had about 1,000 fewer applications than it had in 2000. In comparison, in Japan, there were 163,000 patent applications. Singapore, which has put significant investment into innovation, had 8,700 applications in 2010 and 8,200 in 2000. In Thailand, the increase in patent applications has also been very minimal, with 5,049 in 2000 and 5,857 in 2010. Vietnam has shown a remarkable increase in patent applications, with 1,300 in 2000 compared to 3,100 in 2010.

The 600 million people and 10 economies in the ASEAN region aspiring to become middle class are at risk of being caught in a middle income trap as the modality of such development is cheap labor and the supply of abundant raw materials. In order for countries in Southeast Asia to be equal partners with wealthier nations and reach an environment where it is possible to sell quality products and services to people in such countries, it is necessary for them to graduate from total dependency on foreign technology.

Q2: The East Asia Vision Group II was established and composed a report which was submitted in November of last year. This report was heavily criticized for lacking ambition. What is your evaluation of this report and ASEAN Plus Three?

Surin PITSUWAN
It is quite tame and doesn't really say anything new. Part of the reason for this is because we are presently in a phase of consolidation. South Korea is a proponent of ASEAN Plus Three, and Japan is a member of ASEAN Plus Six. Therefore, the present groups were caught in a tense environment of how to strike a balance between the ASEAN Plus Three and ASEAN Plus Six models. ASEAN Plus Six would also include India, Australia, and New Zealand. The East Asia Vision Group II, proposed and financed by South Korea, came up with some fine-tuning rather than ground-breaking changes due to being caught up in the middle of this tension. ASEAN has seen something similar take place. Rather than choosing between the two models, it came up with its own proposal that all five FTAs should be combined and standardized where possible. This is also more of a consolidation and development of processes which have already begun as opposed to proposing something totally new. This is understandable given its difficult position. It seems that this exercise was beneficial in the sense that it helped to review the regional integration efforts which have been made since the East Asia Vision Group I report was made.

Q3: As mentioned earlier, all ASEAN countries are very different, and it is sometimes said that it will be difficult to deal with merging them into one economic community. What kind of issues could potentially be problematic in solving by 2015, and what would be good advice on how to deal with them?

Surin PITSUWAN
Any enterprise of this nature must face many challenges. In particular, ASEAN is a collection of very diverse countries each with its own peculiar economic conditions. What is likely to be the most important difficulty will be protectionism. While it is true that tariffs are down, non-tariff barriers (NTBs) are being erected. For example, an NTB could involve certain commodities only being allowed to be transported to specific ports far away from urban areas. In this case, if the goods are perishable, then this can become a big problem. In the ASEAN region, there are several related problems. For example, in order for ASEAN nations to be able to export food to Thailand more freely, Thailand must reduce its food safety standards. Thailand refuses to do this as it would likely lose business in exporting food to Japan. This kind of issue presents a significant challenge in moving toward an ASEAN Economic Community in 2015. It is essential that ASEAN concentrates on solving protectionism and NTB issues. At present, the amount of trade within the ASEAN region accounts for only 25% of its total worldwide trade. In comparison, the EU trades more than 70% of its total worldwide trade within the EU area. Therefore, it is also important that the ASEAN region increases the amount of trade within itself to become a viable economic community. In order to solve this problem, the private sector needs to be encouraged to cross borders. Small and medium enterprises (SMEs) by nature don't have the financial, management, or technological capacity to promote this, and it may become necessary to set up establishments similar to the Japan External Trade Organization (JETRO) in countries within the ASEAN region. Such establishments could research and provide feedback to the private sectors in the ASEAN region in order to promote cross-border trade.

In conclusion, tremendous gratitude is owed to ERIA for helping ASEAN develop a clear vision of its future. This is a great gift from the people of Japan to ASEAN and East Asia. In the last five years, ERIA has climbed the ranks of the best economic research institutions in the world. Of the approximately 5,000 existing institutions, ERIA is ranked 30th this year. This is a credit to ERIA, METI, and Japan. Through ERIA, Japan has already developed a strong intellectual and human connectivity with the rest of East Asia.

*This summary was compiled by RIETI Editorial staff.