signing on to liberalization: afta and the politics of regional economic cooperation

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Signing on toliberalization: AFTA andthe politics of regionaleconomic cooperationRichard StubbsPublished online: 26 Nov 2010.

To cite this article: Richard Stubbs (2000) Signing on to liberalization: AFTAand the politics of regional economic cooperation, The Pacific Review,13:2, 297-318, DOI: 10.1080/095127400363604

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Signing on to liberalization: AFTA and the politics of regionaleconomic cooperation1

Richard Stubbs

Abstract From the inception of the A ssociation of Southeast A sian Nations (ASE AN) in 1967 to 1991 economic cooperation among its members was virtually non-existent. However, in January 1992 the leadersof the member states agreed to work towards an ASE AN Free Trade Area(AFTA). Following an uncertain initial phase the leaders rededicated them-selves in 1995 to an accelerated implementation of the A FTA agreement.The key to the change in policy and to the relatively successful implemen-tation of AFTA was the shift in the domestic balance of power in Indonesia,Malaysia, the Philippines and Thailand from economic nationalists to liberalreformers. This occurred as the result of a series of recessions and boomsthat affected the economies of the region from the early 1980s onwards.Also crucial to the successful implementation of AFTA was the distinctiveapproach to regional cooperation that has developed among the ASE ANmembers.

Keywords ASE A N; regionalism; liberalization; regional economic co-operation; nationalism.

Introduction

In January 1992, at the Fourth Summit in Singapore, the leaders of themember governments of the A ssociation of Southeast Asian Nations(A SE A N) agreed to work towards an A SE A N Free Trade A rea (A FTA).Following a halting initial phase, during which there was a good deal ofuncertainty about the future of A FTA , the region’s leaders, � rst at theA SE A N Economic Ministers’ Meeting in September 1994 and later at

The Paci� c Review, Vol. 13 No. 2 2000: 297–318

Richard Stubbs is a Professor of Political Science and Chair of the Department of PoliticalScience, McMaster University.

A ddress: D epartment of Political Science, McMaster U niversity, H amilton, O ntario, CanadaL8S 4M4. E-mail: [email protected]

The Paci� c ReviewISSN 0951–2748 print/ISSN 1470–1332 online © 2000 Taylor & Francis Ltd

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the Fifth ASE A N Summit in Bangkok in D ecember 1995, decided torededicate their governments to an accelerated implementation of A FTA .Prior to 1992, economic cooperation among the A SE A N states had beenvirtually non-existent. The period between the two summits, therefore,proved to be a watershed in the promotion of regional economic coop-eration in Southeast A sia.

This analysis examines the domestic factors which led to this majorswitch in foreign economic policy and the formation of a regional econ-omic organization by the member states of A SE A N. The argument is thatchanges to the region’s economies and the international political economy,set in train by the economic crisis of 1985–86 and the � ood of foreigncapital that entered the region from the late 1980s onwards, produced ashift in the domestic balance of power between economic nationalists and liberal reformers. This shift led to the drawing up, and gradual imple-mentation, of A FTA. It is also argued that the nature of the domestic and regional institutions and the prevailing regional political culture helpexplain the form of the negotiations that set up A FTA as a regionaleconomic cooperative arrangement and the way in which the A FTA agree-ment was implemented.

Before analysing the domestic decision-making in A SE A N with regardto trade policy, it is important to sketch in the general economic orien-tation of the member states and the political structures within which thedecisions were taken. A SE AN was formed in 1967 when Indonesia,Malaysia, the Philippines, Singapore and Thailand signed the BangkokD eclaration. Brunei became a member in 1984. O f these six membersBrunei has a population of only 300,000 and is almost entirely dependenton oil exports for its revenue. Singapore, with a population of 3 million,is also small and as the region’s entrepôt has always had an open tradingpolicy. A ny regional reduction in tariffs would clearly be in Singapore’sinterests. The other four members currently have populations of varyingsizes: Malaysia 22 million, Thailand 60 million, the Philippines 74 millionand Indonesia 202 million. The degree to which each country’s economycould, in the late 1980s, be considered open to trade in goods was tied tothe size of its market. Indonesia was the least open economy with thePhilippines and Thailand close behind. Malaysia clearly had a much moreopen economy though it was nowhere near that of Singapore. WithinA SE A N, then, the key members, in terms of their orientation to regionaleconomic cooperation and their pivotal role in a future regional cooper-ative arrangement, were those with the largest markets: Indonesia, thePhilippines, Thailand and Malaysia. The governments of these countrieshad to make a major change in policy in order for regional economiccooperation to be realized.

Fundamental to the prospects for a change in policy was the fact thatamong the ASEA N members decision-making was highly centralized,especially in Indonesia, Malaysia and Singapore. This was essentially a

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legacy of the Cold War and the need to mobilize resources to counter the threat from communism. The result was that in the late 1980s andinto the 1990s foreign economic policy decision-making processes wererelatively closed with few veto points. A lthough each country had anelected legislature, its powers on most issues, including those related totrade policy, were very limited. D ecisions on trade policy were made bya very small group, which included technocrats, usually housed in aneconomic planning agency and reporting directly to the prime minister orpresident; senior of� cials in key ministries; and responsible ministers. Thebusiness community was fairly small and, while business associations thatcould lobby governments were on the increase, those that most effectivelyrepresented business interests had close personal links to senior politi-cians and of� cials. Labour, because of of� cial fears that it might be takenover by communists, was essentially neutered. Exceptions to the lack ofveto points in regional decision-making were to be found in Thailand andthe Philippines. In Thailand, the growing importance of parliament fromthe late 1980s onwards made electioneering more and more competitiveand expensive, especially as vote buying was increasingly common.Business interests which were able to fund politicians therefore becamein� uential and were able to use their newly acquired power to promoteor block speci� c legislation (Haggard and MacIntyre 1998: 386). In thePhilippines the ‘People’s R evolution’ of 1986 had produced a weak pres-ident and a legislature, especially the senate, which could veto legislation.The legislature was a major vehicle for protecting local business interests.

A mong the decision-makers in each country there was a range of views about the economic and trade policies that should be followed.G enerally, however, the individuals involved fell into one of two groups:the economic nationalists or the liberal reformers. The economic nation-alists emphasized the need for state-building through state interventionin the economy. In a world which they viewed as highly competitive andcon� ictual, industrialization was to be undertaken through economicpolicies which helped to protect nascent import-substitution industries and gave a comparative advantage to emerging export industries (Gilpin1987: 31–4). By contrast, liberal reformers assumed that the market, notthe state, constituted the most effective and productive way of organizingeconomic relations. They sought to open up their economies to marketforces through deregulation and privatization, and to encourage the free� ow of capital and trade so as to exploit the perceived mutual gains fromparticipating in the expanding global economy (G ilpin 1987: 26–31).D uring the 1980s and 1990s these two approaches dominated the debateover economic policy in Indonesia, Malaysia, the Philippines and Thailand.

The following assessment of the way in which the small decision-makinggroups across the ASE A N region signed onto A FTA and then reaf� rmedtheir commitment to the A FTA agreement is divided into four parts. The� rst part reviews ways in which the region-wide recession of 1985–86 led

Richard Stubbs: Signing on to liberalization 299

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to a shift in the balance of power between the economic nationalists andthe liberal reformers. The second part examines the process which led tothe signing of A FTA at the 1992 A SE AN summit. The third part detailsthe problems that A FTA faced and the set of circumstances which led tothe A SE A N governments’ reaf� rmation of their commitment to AFTAat the 1994 ASEA N Economic Ministers’ Meeting and the 1995 A SE A Nsummit. The � nal part tackles the issue of the impact of the regionalculture and institutional capacity on the evolution of A FTA .

Recession and the rise of the liberal reformers

D uring the � rst twenty years of its existence A SE A N was essentially a polit-ical rather than an economic organization. Political goals predominated inlarge measure because of the common internal threat from communistguerrilla groups, the external threat from communist Vietnam, and theimperatives of maintaining good relations within non-communist SoutheastA sia so as to be able to establish and sustain regional stability. O n theeconomic side, A SE AN attempts to generate projects that linked memberstates were fraught with problems and essentially proved fruitless. Even the A SE AN Secretariat has had to admit that the A ssociation ‘wentthrough a long period of experimentation with alternative modalities of co-operation that had limited success’ (A SE A N Secretariat 1997a: 87). ThePreferential Trading Arrangement (PTA ), the A SE A N Industrial Project(AIP), A SE A N Industrial Complementation (A IC) and the A SE A NIndustrial Joint Venture (AIJV) all foundered on A SE A N indifference.

Others have noted the various reasons for this lack of interest ineconomic cooperation among A SE A N governments during the periodfrom the late 1960s to the mid-1980s (Bowles 1997; Bowles and MacLean1996; Ravenhill 1995; Tan 1996). Importantly, for the analysis being under-taken here, most of the reasons tended to bolster the position of the econ-omic nationalists and undermine the arguments of the liberal reformers.For example, the import-substitution industrialization so favoured by econ-omic nationalists proved reasonably successful during the 1970s and eveninto the early 1980s. Similarly, the threat posed by Asian communism, andin particular concerns about the regional intentions of Vietnam, reinforcedthe arguments of the economic nationalists. These economic nationalistsadopted an essentially neomercantilist stance that emphasized the needfor a strong economy that was not at the mercy of antagonistic actionsby enemy states (Jones 1986: 146–50). Moreover, even for liberal reformersregional trade liberalization was not seen as a high priority because trade between ASEAN states was so limited. A t no time during the periodfrom 1975 to 1985 did intra-A SE AN trade exceed 18 per cent of totalA SE A N trade. A nd it was actually lower during this period than in 1970when intra-regional trade had been at 21 per cent. Furthermore, intra-A SE A N trade was a mere 4 per cent if Singapore’s entrepôt trade with


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its neighbours, especially Indonesia and Malaysia, is excluded (A SE A NSecretariat 1997a: 43; 1997b: 47–8; Narongchai and Stifel 1992: 32).

It was the region-wide recession of 1985–86 prompted by low commodityprices that was the key to the shift in the balance of in� uence away fromthe economic nationalists and towards the liberal reformers. Combinedwith speci� c developments in each of the four key countries, the mid-1980s recession forced regional governments to reassess their tradepolicies. The Malaysian government had taken advantage of high pricesfor its oil and other commodities during the 1970s to implement the NewEconomic Policy which sought to redirect wealth to the Malay section ofthe population and alleviate rural poverty. A lso prompted by economicnationalists, the government initiated a major import substitutionprogramme in the heavy industry sector in the early 1980s. The 1985–86recession had a signi� cant impact on both these policies. Particularly hardhit was Prime Minister Mahathir Mohamad’s heavy industry policy. Facedwith the possible failure of projects such as the new cement plant and the ammonia–urea fertilizer venture, as well as major problems with thedevelopment of a ‘national car’ and its steel-making subsidiary, Mahathirwas pressed by liberal reformers to open up the economy and seek outforeign direct investment (FDI) on a joint-venture basis to bail out hisindustrialization policy (Bowie 1994). Signi� cantly, foreign companies were actively encouraged to enter into joint ventures with leading Malaybusinessmen. This initiative not only redirected wealth towards the Malay community but also provided a key group of the prime minister’ssupporters with funds he could draw on in his battle with a dissidentfaction within the politically dominant United Malays National O rgani-zation (UMNO). In other words, Mahathir and his closest political alliesmoved from being essentially economic nationalists in the early 1980s tomoderate liberal reformers, who were increasingly convinced of the valueof opening up the Malaysian economy to the wider global economy (Bowieand Unger 1997: 86–94). By the early 1990s the liberal reformers, withthe prime minister and Anwar Ibrahim, the new � nance minister, in thevanguard, were clearly in the ascendency.

In Thailand during the 1980s the balance between economic national-ists and liberal reformers swung back and forth. D uring the 1970s andwell into the 1980s economic nationalists in the bureaucracy and in keyimport-substitution sectors of the economy were able to thwart theattempts by technocrats, bankers and others to open up the economy andencourage export industries. With the onset of the mid-1980s recession,the government of G eneral Prem Tinsulanond turned increasingly to the liberal reformers to chart a new export-oriented economic course. Led by Snoh Unakul, who was the Secretary-General of the NationalEconomic and Social D evelopment Board (NESD B), and supported by agrowing number of business associations, the liberal reformers within the main economic agencies prompted the government to devalue the


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baht and promote the export sector (Bowie and U nger 1997; Laothamatas1992; Muscat 1994: 178; Pasuk and Baker 1995). However, the economicnationalists re-emerged in July 1988 when Chatichai Choonhavan becamethe � rst elected leader since 1976. Chatichai’s alliance of businessmen-politicians forced the NESDB, as well as many of the liberal reformisttechnocrats who had reached in� uential positions, onto the sidelines. Theliberal reformers had to wait until the coup of February 1991 to regaintheir hold on the government’s economic and trade policies.

In the Philippines the economic nationalists, who were tied to the long-standing policy of import-substitution industrialization (ISI), traditionallydominated economic policy-making. During the 1970s they sustained theISI approach by means of a debt-driven growth strategy. H owever, higherprices for imported oil, rising world interest rates, and lower prices for itsexported commodities, meant that the Philippines faced a series of balanceof payments crises from 1980 onwards. The Philippine government thenhad to turn to the World Bank and the IMF to deal with its growing debt problems (Lindsey 1992: 84–92). The consequence was that thetechnocratic liberal reformers who had been brought into the governmentby President Marcos and who had found their ability to counter theeconomic nationalism of the ‘cronies’ limited, had powerful external alliesin both institutions. H owever, the measures that the Marcos regimeadopted to open up the economy in the early 1980s were overturned asthe economy went into a tailspin following the assassination of opposi-tion leader Senator Benigno Aquino in October 1983. Not until Marcoswas overthrown in 1986, and the new government of Corazon A quinotook of� ce, did the economic nationalists gradually begin to lose theirin� uence. Pushed from within by liberal reformers, such as those at theNational Economic and D evelopment Authority, and forced by depen-dence on the IMF and the World Bank to liberalize the economy in return for loans to get the country out from under its debt problems, theA quino government slowly overcame opposition from vested interests andrestarted the stalled liberalization process. Speci� cally targeted from 1989onwards were import tariffs on a wide range of goods.

In Indonesia it was not just the large internal market but the successiveoil booms of the 1970s which gave the economic nationalists their pre-eminent place in government decision-making circles. A s Richard Robisonhas noted, Indonesia’s large oil reserves and the oil boom ‘made it possiblefor the state to begin establishing the sort of economy envisaged by nation-alist economic planners since the 1950s – an economy built upon a largeindustrial base with a capacity to produce both capital goods and basicindustrial inputs’ (Robison 1986: 182). U p until the early 1980s, then, theeconomic nationalists, whom A zis refers to as the ‘engineers’ and whowere led by B. J. H abibie, held sway over the liberal reformers. The liberalreformers were led by Widjojo Nitisastro and included high-level bureau-crats and A merican-trained U niversity of Indonesia-based economists


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(A zis 1994: 411–15). However, the precipitous fall in oil prices, the reces-sion of the mid-1980s and the country’s rapidly worsening balance ofpayments position, forced the Suharto government to turn to the liberalreformers to seek a way out of the crisis (MacIntyre 1992). G radually, awhole set of economic reforms were put in place. The rupiah was devalued,foreign investment rules were liberalized, some non-tariff barriers wereeliminated, and import tariffs were reduced.

Overall, then, the economic problems faced by Indonesia, Malaysia, thePhilippines and Thailand during the 1980s swung the balance within eachcountry’s small domestic decision-making group towards the liberal refor-mers. A nd by 1991 other factors had begun to reinforce this trend. Mostnotably, the Plaza A ccord of September 1985 and the resulting rapidappreciation of the yen forced Japanese exporters to seek low-cost exportplatforms outside Japan. A s a consequence Japanese companies investedover U S$16 billion in the A SE A N states between 1987 and 1991 (A SE A N–Japan Centre, 1992; Pasuk 1990). Moreover, in order to continue tocompete with Japanese manufacturers, other companies from the U S,Europe and the A sian newly industrializing economies (NIEs) outside ofSoutheast A sia – Hong Kong, South Korea and Taiwan – had to followthe Japanese lead. The total inward � ow of FD I to A SE A N in the � veyears 1987–91 rose to over U S$42 billion (Chia 1998). The prosperity that this unprecedented wave of FDI produced helped to smooth the way for the policies put in place at the urging of the liberal reformers. A tthe same time the rapidly growing number of international companiesinvesting in the region swelled the ranks of the supporters of the liberalreformers and their approach to economic development.

By the early 1990s, then, the governments of the A SE A N region weremore sympathetic to the possibility of a regional trading arrangement thanthey had been only a few years earlier. But the issue did not appear tobe high on the agenda of any of the governments. What was needed wasa well-placed liberal reformer to champion a new approach to regionaleconomic relations.

AFTA and the 1992 summit

The origins of the 1992 agreement to put in place an A SE A N Free TradeA rea are surprising but also instructive. In February 1991 the Thai mili-tary launched a coup against the business-based, and in many ways highly corrupt, politicians who had used their power through the late 1980s to advance their own mainly economic nationalist interests, roll backbureaucratic authority and undermine the military’s institutional controlof the state. The new junta chose as prime minister A nand Panyarachun,a former foreign service of� cial, technocrat and liberal reformer. It was hoped that he would be able to rally business and bureaucratic support for the new regime. A nand’s independently-minded, liberal


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reform-oriented cabinet of businessmen and technocrats immediately wentto work to put in place economic policies that met the needs of the rapidlyexpanding export-oriented, Bangkok-based business sector (Pasuk andBaker 1995: 355–6). They cut import taxes, reduced exchange controls and expanded the role of the stock market. Many of these reforms grewout of analysis and projections undertaken earlier by liberal reformers at the NESDB and the Thailand D evelopment Research Institute (TD RI) as well as those at similar policy think-tanks around the regionand at the in� uential A SE A N Chambers of Commerce and Industry. Theidea of an ASE A N-wide free trade area was integral to the set of liber-alizing proposals being discussed by these policy-oriented organizationsand to the liberalization programme being developed by the A nandadministration.

A nand � rst broached the topic with Singapore’s new prime minister,G oh Chock Tong, in April and pressed the idea on other A SE A N leadersover the next few months (Business Times [Singapore], 17 August 1991).H e publicly made a pitch for a regional free trade area in June 1991. Theidea was endorsed as a regional project at the A SE AN Foreign Ministers’Meeting in July and later at the A SE A N Economic Ministers’ Meeting inKuala Lumpur in O ctober (Straits Times [Singapore], 28 October 1991).A regional free trade area was clearly seen as providing ASEAN with a much needed new focus. It would allow the upcoming Singapore summitto appear to be giving the A ssociation a renewed sense of purpose anddirection now that the Cold War was over. A regional free trade arrange-ment, therefore, was thought to be an apt solution to both a politicalpredicament and a set of emerging economic challenges.

In each country discussions about a possible A FTA were kept to a verysmall group as leaders determined the minimum level of commitmentsthat could credibly be made while acceding to A nand’s forcefullypresented proposition. During the last few months of 1991 senior of� cials,persuaded by the liberal reformers’ arguments about the value of openingup their economies and reducing protectionism, worked feverishly to puttogether a proposal for the Fourth ASEAN Summit to be held inSingapore in January 1992. A t the summit, with Indonesia � nally fallinginto line, A FTA was launched with the full support of all the A SE A Nleaders. Anand’s persuasive sponsorship of A FTA had borne fruit surpris-ingly quickly.

Under the A FTA agreement the signatories committed their govern-ments to reduce tariffs on intra-A SE A N trade in manufactured goods,processed agricultural products and capital goods to 0 to 5 per cent within� fteen years starting in January 1993. They would also seek to remove all non-tariff barriers. The key to A FTA was the common effectivepreferential tariff (CEPT). The CEPT covered three main categories. First,� fteen product groups were put on the ‘fast track’ of tariff reductions.2

This meant that those items for which the current tariff was under 20 per


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cent would be reduced to 0–5 per cent in � ve years. Those items for whichthe current tariff was over 20 per cent would be reduced to 0–5 per centtariffs by 2003. Second was the ‘normal track’. Most goods were in thiscategory. It was envisaged that ‘normal track’ items with tariff rates above20 per cent would be reduced in three stages so as to reach a level of 0–5 per cent by 2008. Those with tariff rates below 20 per cent wouldhave their tariffs reduced to 0–5 per cent by 2003. Third, and � nally, there was an exclusion list. A gricultural products were excluded and govern-ments could also add items to this list as they saw � t. Member governmentscould also temporarily exempt products which were thought to be sensitiveto the development of domestic industries (A SE AN Secretariat 1997a: 47;R avenhill 1995: 857–8). Items from the machinery and electrical appli-ances sectors, as well as from the vehicle sector, were expected to be puton this list in the � rst instance (Baldwin 1997: 48).

The speed with which the AFTA proposal moved from the drawingboard to a signed regional agreement was clearly signi� cant. First, becauseit was personally sponsored by a leader of one of the ASEAN membersit had to be dealt with by the other leaders at a senior level. It appealedto the other leaders not only because it meshed with the reforms theywere making in their own economic policies but also because they had asummit to hold. A s only the fourth summit in A SE A N’s twenty-� ve-yearhistory the meeting needed a fairly dramatic initiative as its centre-piece.This deadline left little time for the AFTA proposal to be discussed atthe lower levels of each member state’s bureaucracy and for oppositionfrom the economic nationalists to be effectively mobilized. Similarly, thebusiness community was not widely consulted. In Thailand the militaryhad dissolved parliament and there were no elections until March 1992.A ccess to the political process was, therefore, limited for those in the busi-ness community who might be adversely affected by A nand’s initiative.In the other capitals, the ‘soft’ authoritarian regimes did not canvass thebusiness community very widely as they dealt with the rapidly evolvingThai proposal. Even in the Philippines, which had by far the most opendecision-making process on trade policy, the business community was givenlittle chance to rally opposition to the proposal. In the seven months fromthe time Anand’s proposal was made public to the signing of the agree-ment, opponents of A FTA had no real opportunity to derail, or even alterthe form of, the agreement.

But the speed with which the agreement went through had a secondimportant consequence. When it was signed in January 1992 of� cials hadvery little time in which to map out the details of the A FTA agreement.Consequently, it was a relatively brief document – less than ten pageswere devoted to the CEPT – with very limited directions for implemen-tation. The brevity of the A FTA agreement is in direct contrast to freetrade agreements in the industrialized world. For example, the Canada–U S Free Trade A greement was negotiated over 26 months; formal


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negotiations for its successor, the North A merican Free Trade Agreement(NA FTA ), took 14 months (Lee 1992: 69). Both agreements are set outin thousands of pages that use legal language to detail most aspects ofthe implementation stage.

The shortage of explicit instructions on how to implement much of theA FTA agreement and the lack of opportunities for opponents to expresstheir objections and push for changes created a good deal of scepticismin the region that AFTA would succeed. It was clear that the imple-mentation stage would be the battleground where A FTA’s adversaries,including the economic nationalists, would congregate. Indeed, during the twelve months after the signing of the A FTA agreement, there wasevidence of considerable ‘backsliding’. This reneging on the agreementwas especially apparent in Indonesia, the Philippines and Thailand which had the largest markets, the highest tariffs and the greatest concernsabout competition from more advanced, ef� cient industries in Singaporeand Malaysia. D uring 1992 it became obvious that only Malaysia andSingapore were going to begin cutting tariffs by the agreed 1 January 1993deadline. Within some governments the economic nationalists mounted aspirited attack and there was talk of delaying the start of their requiredtariff cuts to 1995, 1996 or even 1999 (Business Times [Singapore], 26 May 1993 and 5 O ctober 1993). The commitment to AFTA appeared tobe ebbing.

The rededication to AFTA’s goals

There were three levels at which there was cause for concern that AFTAmight be derailed. First, at the level of the A SE A N leadership, advocatesof the agreement were worried that changes at the top would jeopardizethe implementation stage. This fear was highlighted in Thailand when,after the March 1992 elections, the traumatic events of the middle-classrevolt of May, and the elections of September, the government of ChuanLeekpai took of� ce and forced a postponement of an AFTA MinisterialCouncil meeting that was to have taken place in Manila in O ctober 1992. With A nand gone and Chuan’s pro-business government supportedby cash-driven politicians back in � rm control, Thailand, once A FTA’ssponsor, became much more cautious. Local business interests, whichsponsored a number of Chuan’s political supporters; A FTA sceptics; andeconomic nationalists more generally, began to raise their objections.Concern was also expressed that President A quino’s successor, FidelR amos, would not be able to hold the Philippines to the original 1992summit agreement. A FTA advocates were troubled by the fact that R amoshad won power with only 23.4 per cent of the popular vote in the May1992 elections and that, rather like his predecessor, he was widely thoughtto lack the political will to assert the strong leadership that such a majorforeign economic policy initiative as A FTA required. With two of the six


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summit signatories gone within twelve months, the region’s commitmentto AFTA came into question.

The second level at which A FTA could be sidetracked was within thebureaucracies of the key economies. While the agreement had beenworked out and agreed to at the senior ministerial levels of the A SE ANgovernments, the responsibility for implementing A FTA lay with those atthe director-general level and below. Many of these individuals had strongeconomic nationalist instincts (Narongchai and Stifel 1992: 40). It was herethat what Jusuf Wanandi, an Indonesian commentator, has described asthe ‘vested interests of the bureaucracy’ were able to exert their in� uence(Business Times [Singapore], 25 A pril 1992). A s the Malaysian ministerfor international trade and industry, Ra� dah A ziz, noted, with more than45,000 different tariff lines to be considered the economic nationalists andcautious bureaucrats with links to import-substitution industries, or sympa-thetic to small � rms seeking protection from large foreign corporations,had plenty of opportunities to delay the implementation process (BusinessTimes [Singapore], 26 May 1993; Straits Times [Singapore], 23 August1993).

Finally, of course, there were the industries and industrial sectors thatwould be put at a disadvantage by A FTA. A steady stream of the A FTA‘losers’ came forward during 1992 and 1993. Thailand’s petrochemicalindustry was one of the � rst to formally petition its government for exclu-sion from A FTA , citing unfair competition from more establishedproducers in Singapore. Other sectors of the Thai economy, such aselectronic parts and components and plastics products – both on the ‘fasttrack’ – soon followed suit. At least initially the Thai government wasvery sympathetic (Straits Times [Singapore], 10 D ecember 1992). In thePhilippines the textile – a ‘fast track’ product group – apparel, footwear,and iron and steel industries all thought of themselves as being put at amajor disadvantage by A FTA . They appealed to their government forprotection (A zarcon and Tecson 1995: 43–4). In Malaysia even the � nanceminister, A nwar Ibrahim, who was very sympathetic to the liberalreformers’ cause, expressed concern that recently privatized companiesmight need protection from more advanced competitors. In particular, henoted that with Malaysia developing its own car, the Proton Saga, theautomobile industry was in need of exemption from A FTA. A similardispensation was sought for Malaysia’s petrochemical industry. Like itsThai counterpart, it was viewed as being at a major disadvantage in theface of imports from Singapore. A nd in Indonesia, which was of specialimportance because it contained over half the population of A SE AN,special protection remained a high priority for the country’s powerfulindigenous corporations (Baldwin 1997: 60). In other words there wasconsiderable pressure on the four governments with the largest marketsand a tradition of high protective tariffs to go slow or even renege on theA FTA agreement commitments.


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But, while groups opposed to A FTA began to mobilize, the transfor-mation of the domestic economies of the region and the internationalchanges that had begun to emerge around the time of the original deci-sion to sign A FTA began to exert mounting pressure on the A SE A Ngovernments (Bowles 1997; Bowles and MacLean 1996; Ravenhill 1995) .D uring 1992, annual Japanese FD I to the A SE AN members rose to US$3.8billion and the total annual inward � ow of FD I reached U S$14.2 billion.A s a result of the wave of FDI that swept through the region, A SE A N’sexports of manufactured goods also continued to grow dramatically. For example, A SE AN exports of manufactured goods to Japan in 1992increased to 35.1 per cent of all exports to Japan and in 1993 to 40.7 percent (A SE AN–Japan Centre 1995: 29). The increase in Japanese invest-ment in the region led to the emergence of a series of networks of partsand components producers linked to assembly plants. This trend wasparticularly noticeable in the electrical and auto industries (Pasuk 1990:51–5; Dobson 1993: 40–59). The Japanese, and indeed other A sian compa-nies that operated networks of production, therefore wanted to be ableto move their products from plant to plant across borders without incur-ring too many costs in the form of tariffs or non-tariff barriers. TheJapanese government started to use the leverage it had over the A SE A Ngovernments, not only because of FD I but also because of the nearly U S$2billion a year in O DA that Japan was providing to A SE AN members(Japanese G overnment 1992), to push for more favourable foreign econ-omic policies (H atch and Yamamura 1996) .

It became clear that the political in� uence of the export manufacturingsector of the economy was growing. This trend added weight to thearguments of liberal reformers who favoured a dramatic liberalization ofregional trade policy. Moreover, the bene� ciaries of A FTA , in particularthe export industries that would gain access to the new regional marketand those industries which would have tariffs reduced on their inputs,began to become more vocally supportive of A FTA . A s Busch and Milnerhave noted, the more a � rm is dependent on exports, the less it will favourprotectionism in general. Furthermore, ‘states are more likely to act onthe demands of exporters and multinationals as these � rms gain politicalclout as they account for a greater share of national income’ (Busch andMilner 1994: 268–9; see also Milner 1988) .

A nd the think-tanks which had housed many of the liberal reformersand originated the idea of a free trade area were also gaining in in� uenceas they expanded their areas of research and fed ideas into the keyministries. Fuelled by funds coming in from their own governments andsupporters of liberal orthodox economics around the world, these policythink-tanks were able both to provide a strong intellectual base for theprocess of regional economic liberalization and to build a momentumfavouring A FTA among the region’s relatively small group of informedopinion-makers.


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In addition, the liberalization reforms put in place by the A nand admin-istration in 1991 were beginning to attract interest in Thailand’s stockmarket and, hence, greater amounts of portfolio investment as well as loansfrom international banks and other offshore investors. With a fall in the per-centage of global FD I going into A SE A N in 1992, Thailand’s neighbourssaw the advantages of a similar set of reforms. A number of regionalgovernments began actively to seek out portfolio capital and short-termloans to supplement the lagging FD I on which they had become so depen-dent for rapid economic growth. In Malaysia, for example, A nwar Ibrahim,who became � nance minister in 1991 and who was associated with a youngergeneration of liberal reformers that included businessmen and technocrats,actively promoted a programme of liberalization which paralleled in impor-tant ways the programme adopted in Thailand. Clearly, the development ofA FTA was seen as an integral part of the liberalization package that theA SE A N members were using to lure global capital to the region.

A t the same time there were a number of important developments in therest of the world. First, the Uruguay R ound of the G ATT, which was com-pleted in D ecember 1993, provided for larger tariff cuts for developingcountries and in a shorter space of time than did A FTA . Second, buildingon the Canada–U S Free Trade A greement which came into effect in 1989,the North American Free Trade A greement (NA FTA) was signed inD ecember 1992 and came into effect in January 1994. Within A SE A N itwas widely assumed that NA FTA would have a trade- and investment-diverting effect that could have an adverse impact on the A SE ANeconomies. Third, the deepening of regional integration in Europe throughthe implementation of the Single European A ct and the consequences ofthe Maastricht Treaty gave an added impetus to those who argued thatSoutheast Asia could not be left behind as the major centres of the world’seconomic power gained added strength through regional trade liberaliza-tion. Finally, within East A sia, China was becoming an increasingly morecompetitive source of low-cost manufactured goods and, because of itsmassive and rapidly expanding internal market, a target of FD I. Indeed,the � ow of FD I into China went from U S$4.9 billion in 1991 to U S$26 bil-lion in 1993, an amount that was nearly twice that going into the A SE A Neconomies (Tan 1996: 3) . The competition from China for FD I was ofconsiderable concern to the ASEA N governments who feared that a diver-sion of investment funds would seriously reduce their rates of growth. Therise of China as a competitor for FDI was seen as a major cause ofA SE A N’s percentage of global FD I falling in 1992. International events,then, added to the arguments being advanced by the liberal reformers andput added pressure on the decision-makers in the A SE A N members tomake sure that more effective regional economic cooperation took place.

Hence, during 1993 and 1994 a series of actions were taken by A SE A Nmember governments which they hoped would allay the fears of thoseadversely affected by A FTA . In Thailand, for example, the government


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set up an 8 billion baht (U S$320 million) fund to aid industries adverselyaffected by A FTA’s provisions. The fund was designed to try to improvethe competitive edge of affected industries through soft loans for suchmeasures as plant upgrading, the training of workers, and research intomore value-added products. Targeted industries included petrochemicals,electronics and palm oil. Other governments were persuaded by indus-tries to reinforce non-tariff barriers or place their industry on the exclu-sion list (Business Times [Singapore], 14 June 1993) .

These side payments were negotiated at the same time as governmentssought ways to accelerate the overall process of tariff reduction so as tofoster increased intra-A SE A N trade and attract more FD I to the region.With mounting pressure to reinvigorate the regional economic coopera-tion process by accelerating the pace of liberalization and broadening thescope of A FTA , the A FTA Council Meeting and the A SE A N EconomicMinisters’ Meeting in September 1994 made a number of importantrevisions to the 1992 agreement. The revisions included a shortening ofthe overall timetable from � fteen years to ten years. Fast-track items wereto have their tariffs reduced to 0–5 per cent by 2000, and reductions intariffs under the normal track were to be completed by 2003. Someunprocessed agricultural products were also immediately included in the CEPT scheme. A working group was established to explore how theremaining products in the unprocessed agricultural sector could beincluded and particularly how to keep the list of excluded ‘sensitive’ agri-cultural products as short as possible. A nd it was agreed that memberswould strive to keep the temporary exclusion list to 7.5 per cent of totaltariff lines and each year from 1995 to 2000 transfer 20 per cent of theproducts from the temporary exclusion list to the inclusion list.

By 1995, then, the momentum had clearly swung behind the liberalreformers. A lthough the suggestion made in July 1995 by the Sultan ofBrunei that member states agree to fully implement AFTA by 2000, failedto receive support from member states grappling with recalcitrant domesticbusiness interests, at the summit in Bangkok at the end of 1995 theA SE A N leaders agreed to rededicate themselves to implementing theCEPT scheme as expeditiously as possible. The Bangkok summit put the� nal seal of approval on the A FTA agreement.

Of course, problems remained. Tariff reductions on key ‘fast-track’ itemssuch as plastics, leather goods, pulp and textiles were much slower thanhoped for (http://www.asean.or.id/economic/tariff). Moreover, of� cials stillhad to deal with non-tariff barriers and the harmonization of tariff nomen-clature, customs procedures and customs valuation. There was also someunease that the rules of origin for an A SE A N product under the CEPT,which were considered relatively liberal, could be abused, particularly forproducts entering A SE A N through Singapore.3 The expansion of A SE A Nto include Vietnam (July 1995), Laos and Burma/Myanmar (July 1997)and Cambodia (A pril 1999) raised concerns that concessions made to the


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new members to allow them to ful� l their A FTA commitments at a muchlater date might be used by other members to demand exceptions forsome of their disadvantaged industries (Chia 1998: 228; Baldwin 1997:48–9, 62).

Yet with political pressure mounting to ensure that A FTA was imple-mented, and key political leaders fully endorsing regional economiccooperation, progress was made. In part, of course this progress was afunction of the limited impact that A FTA had on domestic politicalcalculations. While some industries were adversely affected, overall, witheconomic growth so rapid and sustained and with the general populationessentially unconcerned, all the governments in the region could supporta cautious policy on the advancement of A FTA with few or no politicalpenalties. Economic growth appeared to bene� t, if only marginally, from the development of A FTA while generally the side deals meant that the A FTA agreement generated little in the way of sustained politicalopposition.

From 1995 until the economic crisis started to envelop the region in1997, the provisions of A FTA were gradually implemented. Of� cial targetswere not always met, but generally tariffs were reduced and intra-A SE A Ntrade expanded. Indeed, the average CEPT tariff rate for products in theinclusion list fell from 12.7 per cent in 1993 at the inception of AFTA to6.38 per cent in 1997. Intra-A SE AN trade was expanding at a faster rate than total A SE A N trade with intra-ASE A N exports reaching 24.1per cent of total ASE A N exports (AFTA Council Meeting, O ctober 1997,Press Statement). A green-lane system at customs had been introducedfor CEPT products and governments were looking at ways to implementa December 1995 agreement on trade in services.

The economic crisis of 1997–98 brought about new and con� icting pres-sures on regional governments as they sought to implement A FTA.Signi� cantly, at the 1997 Kuala Lumpur summit and again at the 1998H anoi summit, A SE A N leaders stated that they saw an increase in intra-regional trade as a way of overcoming the economic crisis they all faced.Indeed, in an attempt to take the initiative in the struggle to work theirway out of the economic crisis, the A SE A N leaders at the H anoi summitendorsed a ‘Statement on Bold Measures’ by which the six original signa-tories agreed to move up the implementation of A FTA from 2003 to 2002.In other words, by 2002 the tariffs on all items on the ‘Inclusion List’should be below 5 per cent. Reinforcing the A FTA are the recently intro-duced A SE A N Industrial Cooperation Scheme (AICO ) and the A SE ANInvestment Area (A IA ). Together they seek to attract more FDI to theregion and allow participating companies to move their products betweenA SE A N members at 0–5 per cent tariffs. Spurred on by the same inter-national and domestic economic forces that led to the original A FTAagreement, such as the increasing importance of international tradeagreements and the rising domestic in� uence of the export manufacturing


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sector, the liberal reformers in the member governments pressed homethe need to reduce tariffs and establish a regional trade regime so as tore� ect the general commitment of the A SE A N members to economicliberalization.

But the economic crisis has also bolstered the arguments of theeconomic nationalists. Since the Hanoi summit, for example, the govern-ment in the Philippines has become concerned that major reductions intariff rates will substantially reduce its revenues. Leading politicians feelthe country can ill-afford lower revenues as the government struggles toextricate the economy from the grips of the economic crisis (Businessworld[Manila], 21 May 1999; Manila Times, 24 May 1999). A nd while all govern-ments are still being pressured by industries that believe they will beseverely disadvantaged by the tariff cuts, Indonesia is coming under someof the heaviest pressure because of its disastrous economic circumstances.Indeed, the general chairman of the Indonesian Chamber of Commerceand Industry (KA D IN), Aburizal Bakrie, had called for the governmentto postpone full implementation of AFTA from 2002 to 2005 (A ntara:Indonesian National News A gency, 29 September 1999). Just as impor-tantly, it is still not clear which products will be on the ‘Exclusion List’.Malaysia, for example, has indicated that it will not include automobilesin the tariff reduction programme and Thailand has threatened to retal-iate if its neighbours fail to live up to the letter of the A FTA agreement(Bangkok Post, 19 May 1999 and 1 November 1999) .

Yet, despite the tensions between the liberal technocrats and the econ-omic nationalists, the A FTA agreement continues to be implemented. Theoriginal goals have been regularly replaced by ones which accelerate theprocess of tariff reduction. A t the same time there has been considerable� exibility in the implementation of the agreement. This combination oftarget dates and � exibility has been a characteristic of A FTA that sets it apart from other regional economic arrangements. Certainly, it can beargued that A FTA has developed in a decidedly A SE A N way.

AFTA and the ‘ASEAN way’

The manner in which A FTA evolved, its scope and the extent to which it has been institutionalized, are rooted in a distinctive approachto regional cooperation which has emerged as relations among A SE A N’smember states have developed. What has become known as the ‘A SE A N way’ is essentially a process which characterizes regional multi-lateral relations. A s A charya (1997: 329) has noted, it is an approach whichinvolves ‘a high degree of discreetness, informality, pragmatism, expedi-ency, consensus-building and non-confrontational bargaining styles’ andwhich is ‘often contrasted with adversarial posturing and legalistic deci-sion-making procedures in Western multilateral negotiations’. A SE AN,and by extension A FTA , are based much more on networks of personal


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contacts and social obligations than on formal institutions or legalcommitments. The initial negotiations over A FTA and the subsequentdiscussions about the scope and pace of implementation of the agreementhave clearly been heavily in� uenced by this distinctive approach to theconduct of regional relations. A greeing on principles � rst and then havingsubstantive issues gradually worked out over a period of time was in the best traditions of ASE A N. Playing on the A FTA acronym, one of the original architects of regional economic cooperation, NarongchaiA krasanee, has noted that the process was one of ‘agree � rst, talk after’(Baldwin 1997: 55).

The strategy of developing a vaguely worded statement which did notviolate any of the participants’ basic interests and, therefore, to which allparticipants could agree, allowed A FTA to move forward at a pace withwhich all governments felt comfortable. The key was to allow decision-makers to square the obligations they accrued in signing the agreementwith their commitments to their personal networks of business interestsat home. Musjawarah and mufak at, or ‘consensus’ and ‘consultation’, werethe watch words. A FTA could not advance without all signatories beingsatis� ed that their interests were being safeguarded. In this respect it wasespecially fortuitous that from early 1991, when A nand � rst started topush the idea of a free trade area for A SE A N, to 1995, when the leadersrecommitted themselves to a shorter implementation stage and a widerscope for A FTA , member states’ economies grew at a remarkable rate.The annual growth rates of real G DP (at 1990 prices) averaged over 8 per cent in Malaysia, Singapore and Thailand and over 7 per cent inIndonesia. Even the Philippines, which was in recession in 1991, hadgrowth rates of well over 4 per cent in 1994 and 1995, and was willing togo along with the acceleration of A FTA in the hopes of emulating theeconomic success of their neighbours (A SE A N–Japan Centre 1995). Withsuch high levels of regional prosperity, and with the A FTA provisionsfairly � exible, it was relatively easy to ensure that any domestic obliga-tions that governments felt they had to particular industries could be metthrough one kind of side deal or another.

A SE AN’s style of negotiating and implementing agreements means thatdisputes are rarely aired publicly. O n the contrary, disagreements areusually settled through informal discussions which take place aroundclosed meetings of senior bureaucrats and politicians. In contrast to bothNA FTA and the EU, then, legal dispute settlement mechanisms involvingthe courts or a panel of technical experts are not part of the ‘A SE A Nway’. Indeed, problems that arise within A FTA are dealt with in the � rstinstance by informal discussions among senior of� cials from the economicministries who meet regularly throughout the year. If the problem cannotbe settled in this forum it is sent on to senior ministers meeting underthe auspices of the A FTA Council or the A SE A N Economic Ministers’Meeting. Major problems are dealt with at leaders’ summit meetings; left


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unresolved until changing circumstances allow for a consensus to form;or, in a very few instances and only as a last resort, taken to the WorldTrade Organization. A SE AN � exibility does permit AFTA to moveforward even if some members are not on board. So long as a govern-ment does not object strongly, is not damaged by non-participation, andis not excluded from future participation in the proposed course of action, then the other governments may develop a course of action andcarry it out. O riginally known as the ‘� ve minus X’ approach – whenA SE A N had � ve members – it has become an integral part of the notionof consensus within A SE A N circles. The formula has been extended to ‘full membership minus X’ as A SE A N has expanded to six, then toseven, then to nine and � nally in 1999 to ten (ASE A N Secretariat 1997a: 38).

A SE AN’s � exible, informal approach also means that the member stateshave been reluctant to give much power to a central secretariat. TheA SE A N Secretariat in Jakarta bears no relation to the EuropeanCommission in Brussels. In fact there has been a conscious effort to ensurethat the European form of regionalism is not adopted in Southeast A sia.Most of the administrative work for AFTA is done by A SE AN secre-tariats housed in the foreign ministries of each member government or inspeci� c ministries such as trade or � nance. The A SE AN approach hasalways emphasized that member states retain their sovereignty. Thereshould be no interference in the affairs of other members either bymember governments themselves or by a regional authority, such as aregional secretariat, acting on their behalf.

The regional cultural context is, then, crucial to understanding the wayin which the A FTA agreement was signed and implemented. Moreover,this ‘� exible’ approach is reinforced by a signi� cant institutional constraint.A s H amilton-Hart has argued, the variation in state capacity of a numberof the original signatories, particularly the limited state capacity ofIndonesia and the Philippines, makes it dif� cult for key governments tosign and implement a NA FTA - or EU -style agreement rooted in the ruleof law (H amilton-H art 1999). Certainly, it can be argued that the constantrededication to publicly stated goals, while at the same time conductinginformal negotiations over compliance, is the best way for governmentswith a limited capacity to move forward. It is also, as H amilton-Hart points out, easier for governments to implement agreements which requirethat they withdraw from the market than agreements which dictate thatthey intervene in order to regulate the market (H amilton-Hart 1999).H ence, A FTA has succeeded in a hesitant, limited way where attemptsto regulate other sectors of the economy, the � nancial sector for example,are more likely to fail. Overall, a full appreciation of the scope of A FTA and its institutionalization requires that the limitations imposed bydomestic institutions as well as the cultural context of the region’s polit-ical relations be taken into consideration.


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Conclusion

This analysis of the initiation and evolution of A FTA has highlighted three important points. First, while the international and regional contextswithin which the A FTA agreement was originally signed, then reaf� rmedand � nally implemented were obviously important, the key to under-standing the emergence of A FTA as a regional trading arrangement liesin an assessment of the way in which international and regional trendsplayed into the domestic decision-making process in the key countries.The decisions to sign on to A FTA and then to implement its provisionswere made by governments with domestic constituencies. For the agree-ment to be supported a signi� cant portion of these constituencies, and of the different and often competing factions with each government, hadto be satis� ed that A FTA was generally bene� cial.

A second and related point is that AFTA would not have been possiblewithout a shift in the balance of in� uence from the economic nationaliststo the liberal reformers within the decision-making circles of the fourtraditionally protectionist states of Indonesia, Malaysia, the Philippinesand Thailand. Prior to the early 1980s the economic nationalists held sway.H owever, prompted by the rapid decline in commodity prices from 1983onwards and spurred on by the 1985–86 region-wide recession, as well asdomestic events that were unique to each of the four A SE A N states, theliberal reformers gradually gained the ascendency. The shift did not meanthe end of the economic nationalists. Rather, from 1991 onwards it gavean edge to the liberal reformers which allowed them to push for the liber-alization of regional trade through the AFTA provisions.

Finally, whatever success AFTA has achieved has to be viewed in thelight of the distinctive approach to regional cooperation that has devel-oped among A SE A N members. Certainly, a more rigid goal-oriented, rule-based approach to regional economic liberalization which did not meshwith the prevailing regional culture would have broken down at anynumber of points along the way. The personal commitment of leaders to the A FTA process, the � exibility which has been accorded membergovernments as they have sought ways to deal with domestic oppositionto A FTA (Business Times [Singapore], 30 September 1999), and theinformal approach to disagreements have all helped to move the A FTAprocess along. Of course, consensus and � exibility do not always prevail;con� ict and strategic bargaining have taken place at various times. A ndthis will no doubt continue as the deadlines for full implementation drawnearer. However, A SE AN’s success to date could not have been achievedwithout recourse to the ‘A SE AN way’.

Notes

1 This is a revised version of a paper presented to a Workshop on ‘DomesticD ecision Making and the Formation of Regional Economic Organizations’held at the Center for European Studies, University of North Carolina at


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Chapel Hill in October 1998. I would like to thank Gary Marks, the directorof the centre, as well as the participants for their helpful critique of initialdrafts of the paper. Thanks also go to a number of government of� cials aswell as academics in Southeast Asia – most notably Sorpong Peou, LeonardSebastian and Joseph Tan – for their valuable advice; to the Institute forSoutheast A sian Studies for the use of their library; to Peter Frise and KlarkaZeman for research assistance; and to Natasha Hamilton-Hart, Grace Skogstadand two anonymous assessors of this journal for their constructive comments.

2 The � fteen product groups were cement, ceramic and glass products, chemi-cals, copper cathodes, electronics, fertilizer, gems and jewellery, leather prod-ucts, pharmaceutical, plastics, pulp, rubber products, textiles, vegetable oils,and wooden and rattan furniture (Ravenhill 1995: 858).

3 Products are considered eligible if 40 per cent of the value added has taken place within the AFTA member countries. As Ravenhill notes, ‘the rules are liberal in that they treat a component that reaches the 40% localorigin as being 100% locally produced’ (Ravenhill 1995: 859). Hence, if aproduct is produced by assembling parts from different members then thecumulative total may be less than 40 per cent but still be considered eligible.

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signing on to liberalization: afta and the politics of regional economic cooperation

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