(Preliminary Draft, 30 August 2004)

Southeast Asia Human Development Report Regional Economic Integration and Regional Cooperation in Southeast Asia: Deepening and Broadening the Benefits for

Human Development

2005

Preface This is the inaugural issue of the Southeast Asia Human Development Report (henceforth SEA HDR). While the report is intended to cover the entire region, the focus is on the ten members of the Association of Southeast Asian Nations (ASEAN). Only one country in the region—Timor Leste—is not yet a member of ASEAN and data constraints and its brief history preclude its inclusion in many of the key discussions. There are a number of reasons why a sub-regional HDR merits consideration as a joint effort by stakeholders in the sub-region.

1. There is shared interest among the states to cooperate for regional peace and prosperity. The ASEAN Vision 2020 adopted by the ASEAN Heads of State and Government in Kuala Lumpur in 1997 envisions “a socially cohesive and caring ASEAN where all will enjoy the opportunities for total human development and higher quality of life.”

2. There is a shared goal of eliminating poverty and unemployment, and promoting

human capital development;

3. Many countries share common boundaries, and developments in one country could have significant and immediate spill-over effects—both positive and negative—in other parts of the sub-region;

4. There are agreements such as the ASEAN Free Trade Area, the ASEAN

Investment Area, and the joint Mekong River Development Programme which bind the countries towards a more integrated sub-regional economy;

5. There is common interest to establish the region as a prime destination for foreign

direct investment;

6. There is knowledge to be shared among the countries in such areas as governance, human resource development, design of social development programmes and safety nets, and technology;

7. There are common challenges and threats facing the countries, such as

transmission of HIV/AIDS, transnational crime including drug trafficking, human trafficking, and piracy; labor migration; political instabilities including ethnic conflicts; financial market volatility, unanticipated impacts of globalization, and transboundary pollution;

8. There is an active movement of people’s organizations and civil society wishing

to engage in more active dialogue with governments in the context of regional development challenges.

The members of ASEAN believe it is important to bring the countries in the region at an even pace of development so that the whole region can compete on even footing with the rest of the world. Any lag or bottleneck in one part of the region could drag the rest, and special attention, assistance, and cooperation from the others would be needed if the region’s progress is to move at steady pace. This is the gist of the “Initiative for ASEAN Integration” which is guided by Dr. Mahathir’s principle of “prosper thy neighbor” and by doing so, “prosper ASEAN”. There is clearly a strong “regional identity” in the countries and in the sub-region and are supported by the ASEAN as a regional economic community that can commit to the issues raised in the HDR. The report can provide baselines and benchmarks for assessing the progress on ASEAN Vision 2020 and its related actions and plans, particularly in view of the completion of the Hanoi Plan of Action and the eventual accession of the Vientiane Plan of Action.

Acknowledgement The 2005 Southeast Asia Human Development Report is a joint effort among different institutions and individuals. The Philippine Institute for Development Studies (PIDS) performed the role of Research Manager and was responsible for Chapters I, III, and V. The PIDS team was headed by Dr. Josef T. Yap. The Institute of Strategic and Development Studies (ISDS) represented by Professor Carolina G. Hernandez and Dr. Noel M. Morada prepared Chapter II. The Yuchengco Center of De La Salle University prepared Chapter IV. The team was composed of Dr. Winfred Villamil, Dr. Tereso Tullao, Jr., Dr. Trinidad Osteria, Dr. Julio Teehankee, Mr. Teodoro Deocares, Mr. Vicente Jose Roxas, and Mr. Alain Ampongan. Dr. Wilfrido V. Villacorta, presently Deputy Secretary-General of ASEAN, was instrumental in getting the SEA HDR off the ground while he was president of Yuchengco Center. The United Nations Development Program through its Philippine office provided guidance and financial support. The contributions of the following researchers are acknowledged: Dr. Hadi Soesastro, Centre for Strategic and International Studies, Indonesia; Dr. Mely Caballero-Anthony, Institute for Defense and Strategic Studies, Singapore; Dr. Denis Hew Wei-Yen, Institute of Southeast Asian Studies, Singapore; Dr. Amara Pongsapich, Chulalongkorn University, Thailand; Dr. Bambang Brodjonegoro, Institute for Economic and Social Research, University of Indonesia; Dr. Wisarn Pupphavesa, National Institute of Development Administration, Thailand; and Dr. Helen Nesadurai, Institute of Defense and Strategic Studies, Nanyang Technological University, Singapore. The report greatly benefited from the comments of the many distinguished participants in the Manila Inception Workshop on 18 August 2003, Jakarta National Workshop on 10 February 2004, Kuala Lumpur National Workshop on 13 February 2004, and the Second Regional Workshop held last 9-11 June 2004 in Manila. Finally, the report would not have been possible without the able research assistance of Ms. Jennifer C. De Castro and Ms. Merle G. Galvan of PIDS.

Table of Contents Section Page I. Conceptual Framework and Main Findings 1 A. Overview 1 B. The Challenge in Southeast Asia 2 C. Conceptual Framework 4 Growth and Development Dimensions of Human Development Relating Human Development, Regional Economic Integration and Regional Cooperation D. Main Findings 8 II. Human Development in Southeast Asia 17

A. Southeast Asia: An Overview 17 B. Clustering Southeast Asian Countries on HD Indicators 19 C. Trends in Human Development in Southeast Asia 20 D. Comparing Southeast Asia and Other Regions 23

Southeast Asia in the Context of East Asia East Asia vis-à-vis Europe and Other Regions

E. Explaining the Economic and Social Performance in Southeast Asia 25 Variations in Human Resource Development Accounting for Disparities in Health and Education Expenditures

F. Good Governance in Southeast Asia: Issues and Problems 30 Expanded definition of Governance for Human Development Measuring Good Governance in Southeast Asia Voice and Accountability Political Instability and Ethnic Conflicts Government Effectiveness Regulatory Quality Rule of Law and Control of Corruption

G. Governance and Human Development 42 Good Governance and Human Development Economic and Social Costs of Corruption Statistical Evidence

H. Narrowing the Gap Through Regional Economic Integration and Regional Cooperation 48

III. The Impact of Regional Economic Integration on

Human Development 57 A. Regional Economic Integration in Southeast Asia 57 B. The Impact of Greater Regional Economic Integration on Economic

Performance 59 The Impact of Trade Liberalization The Impact of Foreign Direct Investment

Financial and Capital Account Liberalization and the 1997 Financial Crisis Migration

C. The Impact of Greater Regional Economic Integration on

Human Development 63 Key Issues and Framework Poverty and Income Distribution Health, Nutrition and Labor Standards Gender Issues The Social Dimension of Migration

The Social Impact of the 1997 Financial Crisis Winners and Losers Regional Economic Integration, Regional Cooperation and Governance

D. The Way Forward 83 Social Policy Reconfiguring Macroeconomic Policies and Regional Economic Integration Regional Cooperation and Regional Economic Integration

E. The Impact of Human Development on Regional Economic Integration 91

IV. Regional Cooperation for Human Development 106

A. Forms and Rationale for Regional Cooperation Political and Security Concerns Economic Concerns Functional Cooperation Other Development Concerns

B. Institutional Mechanisms for Regional Cooperation 108 Regional Cooperation for Human Development Initiatives

within the United Nations Greater Mekong Subregion Program of ADB Regional Economic and Social Cooperation in ASEAN

C. The ‘ASEAN Way’ and Organizational Approach 131 Behavioral and Procedural Norms: Non-Interference and the ‘ASEAN Way’ Role of the ASEAN Secretariat Funding

D. Avenues to Enhance Regional Cooperation 135 Non-member States International/Regional Organizations Private Sector Working with Civil Society Challenges of Partnerships with CSOs

E. The Evolution of Regional Cooperation Initiatives for Human Development 141

Research Gaps Trends

F. Recommendations 146 G. Conclusion 149

V. Conclusions and Recommendations 153

A. What is the State of Human Development in Southeast Asia? 153 B. Is Regional Integration Beneficial to Human Development? 153

C. Are Existing Regional Cooperation Mechanisms to Enhance Human Development Adequate? 155

D. How can the Beneficial Effects of Regional Economic Integration and Regional Cooperation be Broadened and Deepened? 155

Chapter I Conceptual Framework and Main Findings

A. Overview Human development is “about people, about expanding their choices to lead lives they value” (UNDP 2002). Economic growth, increased international trade and investment, and technological advancement are all essential. However, they are means, not ends. Their contribution to human development largely depends on their capacity to expand people’s choices and assist in the creation of an environment for people to develop their full potential to lead productive and creative lives This report looks at how regional economic integration and regional cooperation in Southeast Asia can widen the spectrum of choices available to people in this part of the world. Economic integration is a process by which a group of nations brings down tariff and non-tariff barriers to the free flow of goods, services and factors of production among each other in an effort to take advantage of scale economies. The main idea is that the resulting increase in economic activity will lead to far-reaching benefits, lifting the standard of living of the majority of the population. One objective of this report is to review the available evidence relevant to Southeast Asia and determine whether greater regional economic integration—and global integration for that matter—has had a beneficial impact on human development. A related issue is whether greater economic openness has helped narrow the relatively wide development gap among the countries in Southeast Asia. Meanwhile, functional regional cooperation provides a means by which countries can jointly address common problems that transcend national boundaries, thereby increasing the chances that a lasting solution can be found. One important example is the exploitation of a shared resource like the Mekong River, which flows through five countries in Southeast Asia. Regional cooperation can also be an avenue by which economic convergence can be accelerated. This report centers on the activities of the Association of Southeast Asian Nations (ASEAN) in promoting regional cooperation. An important aspect that has generally been overlooked is the feedback mechanism, i.e. how enhanced human development can improve the process of economic integration and even regional cooperation. It has been argued that developing economies need the capability—in terms of infrastructure, technology, and human resource development—to maintain a competitive business environment and economic and social stability in order to capitalize on the benefits of liberalization (Munakata 2002). This implies that developing countries have to attain a critical threshold level of economic and social development in order to participate effectively in both regional integration and globalization. This report highlights forms of regional functional cooperation that can bring about this threshold of development, especially among the lower income countries. For example,

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residents of Southeast Asia can be provided more access to educational and training institutes in the region (e.g. the International Rice Research Institute and the Asian Institute of Technology). This is also related to the process of economic convergence in Southeast Asia. One issue that can be considered openly is whether Southeast Asia needs to establish a region-based human rights system and create suitable region-wide mechanisms for its promotion and protection. Another interesting topic addressed in this report is the structure of regional cooperation that is necessary to mitigate the adverse impacts of greater economic integration. One area is the compensation of the so-called ‘losers’ and the report looks at mechanisms (e.g. a Southeast Asia regional safety net) that can be adopted at the regional level. What has been given prominence since the 1997 financial crisis is regional financial and monetary cooperation with the aim of effectively anticipating, preventing and managing similar episodes in the future. B. The Challenge in Southeast Asia The collective goal of peace, progress and prosperity among countries in Southeast Asia is anchored on a high economic growth path supported by competitiveness, economic integration, and regional peace as expressed in ASEAN Vision 2020: “A concert of Southeast Asian nations, outward looking, living in peace, stability, and prosperity, bonded together in partnership in dynamic development and in a community of caring societies.” While this goal was expressed in the latter part of 1997, it actually describes the development paths that the majority of countries in the region have followed, especially since the mid-1980s. It was during that time that Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand became increasingly globally integrated. Cambodia, Laos, and Viet Nam have assimilated with the process of globalization albeit at varying degrees. Since 1992, the ASEAN member countries have embarked on a path towards greater regional economic integration. Prior to the Asian financial crisis in 1997, the larger countries in Southeast Asia—Malaysia, Thailand, Indonesia and to a certain extent the Philippines—had been referred to as the Southeast Asian Newly Industrialized Economies (NIEs) in recognition of their achievements which had been comparable to the economic growth trajectory of Singapore, Taipei,China and Korea. The region was the new hub of global investment, its importance underlined by a potential market of more than 540 million people, with a combined GNP of $610 billion (2002) roughly equal to that of South Asia, which has a population three times as large. The economic progress was due in no small measure to the greater integration of the NIEs into the global economy. More outward oriented trade regimes spurred export-led industrialization. Meanwhile, capital flows—primarily in the form of foreign direct investment—provided another rationale for the shift to export-oriented activity as the Southeast Asian NIEs were the primary beneficiaries of greater FDI inflows from Japan. However, it was only in 1992 that more concrete steps were taken by ASEAN member

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countries to enhance regional integration in the form of a Regional Trading Arrangement (RTA). The momentum of globalization and regionalization was slowed by the 1997 Asian financial crisis, which uncovered vulnerabilities and challenged the region’s collective goal. A number of other factors that emerged after 1997 have also shaken the confidence in these twin processes: (i) the sharp downturn in the global electronics market, which underscored the vulnerability of the East Asian region to the apparently more volatile electronics cycle; (ii) the continued slump in Japan’s economy and the lingering recession in the US; (iii) the potential threat posed by China and India as competitors for FDI and export markets; and (iv) apprehension over regional and international terrorism. These aspects have added to the regional concerns—both internal and external—that have combined to pose complex challenges to the region that is characterized by a wide diversity of culture. These concerns include: pockets of armed conflict triggered by a combination of ethnic, religious, ideological and political differences; piracy and terrorism; movement of illegal arms and prohibited drugs; trafficking of women, children, and undocumented workers; spread of HIV/AIDS; and transboundary movement of toxic wastes and environmental hazards. The 1999 Human Development Report put in a rather cogent perspective the difficulties that have emerged with the acceleration of globalization: “The challenge is to find the rules and institutions for stronger governance—local, national, regional, and global—to preserve the advantages of global markets and competition, but also to provide enough space for human, community and environmental resources to ensure that globalization works for people—not just for profits.”1 The Southeast Asia Human Development Report seeks to respond to this challenge by coming up with recommended measures and policies that will reduce the sources of the region’s vulnerabilities and ensure an enabling environment of regional stability to support sustained economic growth and human development. These would include policies that reduces disparities across Southeast Asia in order to bring at an even pace the development of countries in the region. Table I.1 presents a comparison over a period of 11 years for the region as a whole. In 1990, the mean per capita income for eight countries for which consistent 1990 data were available for the HDI, was 4,224 in PPP dollars and this grew to 6,706 in 2002. Meanwhile, the human development index (HDI) for these eight countries increased from a mean of 0.645 to 0.713. However, the disparity among countries in terms of per capita income and HDI—as measured by the coefficient of variation—declined only slightly during the same period. The data highlight one of the main challenges related to globalization—that the opportunities and benefits of this process need to be shared more widely. A key message is that even if globalization had led to higher economic growth, its translation into human development has been largely unsatisfactory. Hence, there may be a role for regional integration and regional cooperation in preserving “the advantages of global markets and

1 UNDP Human Development Report 1999, page 1. Emphasis added.

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competition,” and providing “enough space for human, community and environmental resources to ensure that globalization works for people—not just for profits.”

Table I.1 Average Per Capita Income and Human Development Index in Southeast Asia

Per capita income (PPP$)

1990 2002 Human Development Index 1990 2002

Mean*, 11 countries

- 6,760 - .687

Coefficient of variation, 10 countries (%)

- 116.3 - 21.6

Mean, 8 countries**

4,224 6,706 .645 .713

Coefficient of variation, 8 countries (%)

119.0 111.4 18.9 16.8

Mean, 5 countries***

6,098 9,514 0.718 0.782

Coefficient of variation, 5 countries (%)

93.4 88.8 9.8 9.8

*Simple, unweighted mean. **A consistent HDI for 1990 was not reported for Brunei and Myanmar in the 2004 HDR and 2003 HDR. 1990 data for Timor Leste could not be obtained. The 1990 HDI for Cambodia was obtained from the 2003 HDR. ***Indonesia, Malaysia, the Philippines, Singapore, and Thailand Source of Data: UNDP Human Development Report various issues. C. Conceptual Framework Growth and Development Economic growth is a necessary but insufficient condition for the promotion of human development. Beyond quantity, it is the quality of growth that is crucial for human well-being. Growth can be jobless, rather than job creating; ruthless, rather than poverty reducing; voiceless, rather than participatory; rootless, rather than culturally enshrined; and futureless, rather than environmentally friendly. Growth that is jobless, ruthless, voiceless, rootless and futureless is not favorable to human development (Jahan, 2000). In this regard, economic growth is a means of development and not its ultimate goal. Increased income contributes largely if it improves people’s lives. But income growth is not an end by itself. Development should be people-centered and economic growth must be equitable for its benefits to have an impact on people’s lives. The global trading system can engender or hinder the promotion of human development in low-income countries.

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Meanwhile, it can be argued that open trade is a consequence of development, rather than a requirement for it. As countries achieve economic prosperity, they gradually benefit from new opportunities offered by global trade. In this regard, trade follows development and seldom leads to it. A human development–oriented trade regime would help developing countries build their capacity to gain from trade (UNDP 2003b).

Figure I.1 Human Development and Economic Growth Consequently, “high levels of human development promote economic growth, which in turn can promote human development. Conversely, weak human development is likely to result in low growth, further undermining the prospect of future human development.” (UNDP 1996) The link between economic growth and human development is not automatic but negotiated through sensible policy action. The links between them can be mutually reinforcing such that they contribute to either strengthening or weakening each other. (See Figure I.1) Undoubtedly, regional integration and cooperation must be a policy priority for the promotion of human development goals, most especially in poor countries with small markets. Regional cooperation can promote sustained economic growth through the expansion of trading opportunities across small economies (UNDP 2003a). Dimensions of Human Development Human development operates in several dimensions that can frame regional cooperation in the Southeast Asian region. Institutions and initiatives in the region are directly and indirectly pursuing human development principles. These principles are sustainability, empowerment, equity, productivity, and accountability (UNDP, 1996, 2002).

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Sustainability involves considerations of intergenerational equity in which the needs of the present generation are met without compromising the ability of future generations to meet their needs. What is sustained is not a specific stock of productive wealth but a particular level of human development. The level must ideally involve the absence of poverty and deprivation so that people’s opportunities to freely exercise their basic capabilities are sustained Empowerment expands people’s capabilities, broadens their choices and increases their freedom. It enables them to participate in, or endorse, the decision-making that affects the course of their daily lives. Instead of being passive beneficiaries of a process engineered by others, people should be active agents in their own development. Human development seeks equity, not only in terms of wealth or income, but also in terms of basic capabilities and opportunities. From this perspective, everyone should have the opportunity to be educated and to lead a long and healthy life. The promotion of equity oftentimes results in unequal sharing of resources since the disadvantaged sectors, i.e. the poor, sick and disabled may require more resources to support the same level of capability as the rest in society. The productivity of an economy is greatly enhanced by healthy and well-educated people. Hence, the development of human capabilities is an end in itself. Investments in health and education result in high human development dividends. Other investments in human development, such as improving the capacity and organization of workers and management, enabling the use of higher levels of technology, attracting foreign investment and technology, and strengthening private and public institutions (government, legal and financial systems). Accountability is about the power of the people not just to have a voice in official decisions, but to also hold their officials to account for these decisions. It is the right of the people to demand answers to questions about decisions and actions, and to sanction officials or bodies who do not live up to their responsibilities. The call for accountability now goes beyond the public sphere to corporations, multinational organizations and others who have more power in public decision-making. Relating Human Development, Regional Economic Integration, and Regional Cooperation The current SEA HDR links three important concepts: human development, regional economic integration, and regional cooperation. The framework relating these three concepts is depicted in Figure I.2. Regional economic integration has transmission channels similar to that of global economic integration although when measuring impacts quantitatively it would be useful to distill the effects of each. The standard barometer of evaluating its impact is economic growth but as emphasized earlier this is only a necessary condition for enhanced human development. Moreover, as emphasized earlier, the feedback mechanism from human development to regional economic integration and regional cooperation is just as important.

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To trace the transmission mechanism from regional integration to human development, a top-down approach can be applied. The impact of regional economic integration can be measured either from the perspective of a single country (Fukase and Martin 2001) or using a multi-country framework (Imada, et al. 1991). Whatever the perspective adopted—whether single-country or multi-country—the impact of regional economic integration can be classified into two categories: (i) studies that deal with the impact of regional economic integration on specific sectors; and (ii) studies that apply a general equilibrium approach. Sectoral or ‘focused’ effects can be transmitted via trade channels or financial and investment channels and studies of this type abound in the literature (e.g. Austria 1994, De Dios 1994). Some studies have more direct implications on human development especially if part of the analysis addresses effects on employment (e.g. Orbeta 2002) or else the study analyzes the impact on a social issue, e.g. gender (Fontana and Wood 2000). Whatever the level of analysis, the dimension of human development can be incorporated by adopting an appropriate framework or model. A framework that would be quite useful appears in the World Bank’s Poverty Reduction Source Book (Hoekman, et al. 2000). This approach traces the linkages between trade reform and the level of poverty. Another set of studies falls under the MIMAP program (microeconomic impact of macroeconomic adjustment policies) which is described extensively in Chapter III. In this type of framework, vulnerable groups, i.e. sectors that will likely be adversely affected by trade reform—or “losers”—can readily be identified. This is an important consideration when designing safety nets and other measures to mitigate the adverse impacts of regional integration. The flip side is that groups that benefit from the policy changes—or “winners”—can also be readily identified. The second major category of studies looks at the more aggregate impact of regional economic integration, which can be viewed in a general equilibrium framework (Bourguignon, et al. 1991). Similar to the ‘focused’ category, the effects work their way through both trade channels and financial and investment channels. Attention is usually given to the impact of regional economic integration on output growth and resource allocation. This is quite relevant for human development since economic growth is acknowledged to a necessary condition for poverty alleviation (Hoekman, et al. 2000). General equilibrium studies can also be used to pinpoint vulnerable groups, the nature and detail of which depends on the specifications of households in the particular model used. Similar to partial equilibrium studies, the dimension of human development can be incorporated in the analysis by using the appropriate framework or model such as MIMAP. While the MIMAP framework explicitly considers household decisions and in the process addresses the issue of human development, the framework is not complete. Other aspects of human development must be incorporated and this can be accomplished by

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considering the concepts of sustainability, empowerment, equity, productivity and accountability. These concepts were defined at length earlier. Meanwhile, regional cooperation can be viewed as the means by which to forge regional integration and at the same time ensuring progress in human development across the region. This explains the bidirectional flow of the arrows in Figure I.2. First, the report deals with the relationship between regional cooperation and human development. This is accomplished by determining how regional cooperation can bring about greater sustainability, empowerment, equity, productivity, and accountability in key issues such as human resource development, security, environment and labor standards, and movement of natural persons. And second, the report also looks at how regional cooperation can facilitate the process of economic integration. Finally, the importance of human development in facilitating regional integration and cooperation is considered. This issue—represented by the arrow that emanates from human development leading to regional economic integration and the bidirectional arrow between regional cooperation and human development—is particularly important for the lower income countries in the region. The discussion involved normally transcends the boundaries of the economics discipline and brings into focus the issue of democracy and human rights. The state of human development in Southeast Asia is discussed in Chapter II. One explanation for the trend in human development—the quality of governance—is discussed at length in this chapter. Chapter III then presents the state of regional economic integration in Southeast Asia and proceeds to examine whether the process of greater global and regional integration could also explain the trend in human development in this region. This is anchored on the MIMAP framework. Chapter III contains two other important aspects of the report: the feedback mechanism linking human development to the process of regional economic integration and the role of regional cooperation in fostering economic integration. The possible link between regional integration and the quality of governance is also considered. Meanwhile, the evolution of ‘functional’ regional cooperation in Southeast Asia is presented in Chapter IV. The emphasis is on how regional cooperation can help overcome market failure and at the same time enhance human development. D. Main Findings The main findings and conclusions of the report are as follows:

• Southeast Asia is home to diverse races, religions, and cultures. The political and economic systems also differ.

• Countries of Southeast Asia have made significant strides over the past twenty-

five years or so in terms of per capita GDP and human development.

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• There is a considerable amount of disparity in the level of development of countries in Southeast Asia, as measured by either per capita GDP in PPP dollars or the human development index. The gap is much wider than comparable regional groupings in Europe, Asia, Latin America and North Africa. Moreover, compared to the Europe and Latin America, Southeast Asian countries have a lower level of development.

• Not only is there a large disparity, there is relatively very slow economic

convergence in Southeast Asia. This is true not only for the eleven Southeast Asian countries but also when only Indonesia, Malaysia, the Philippines, Singapore and Thailand are considered. Income distribution within countries of Southeast Asia is generally more unequal when compared to countries of the other regions.

• The relatively low level of development, particularly with regard to the CLMV

countries, can be attributed largely to historical factors (e.g. the debilitating wars and conflicts in the region).

• The large disparity and slow convergence process is partly due to the disparities

in human resource development and quality of governance. Indicators relevant to the quality of governance of countries in Southeast Asia are highly correlated with the human development index. These indicators also show a lack of convergence.

• The disparity in human resource development can be explained by differences in

government priorities (e.g. higher spending for national defense compared to education), types of social programs, and available resources.

• Many of the problems related to human development in Southeast Asia could be

addressed by increasing government effectiveness, particularly in the delivery of social services especially for the poor and vulnerable sectors.

• Some studies have shown the negative effects of corruption on economic growth

and specific health and education outcomes. The presence of corruption also creates a bias towards large infrastructure projects at the expense of activities focused on human resource development since the former provide an opportunity for larger wealth transfers.

• From another perspective, the wide disparity in development indicates that some

of the countries have not achieved a critical threshold of development in order to participate effectively in the globalization and regional integration processes. A key question is whether greater regional economic integration and global integration helped narrow the development gap in Southeast Asia.

• Southeast Asia has become increasingly globally and regionally integrated

through trade flows, increase in foreign direct investment, and intra-regional

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migration. Many countries also underwent greater financial and capital market integration.

• Regional economic integration in Southeast Asia has followed the path of

‘regionalization’ or market-based integration. It is therefore an adjunct to global integration. This is in contrast to what is termed ‘regionalism’ which refers to formal economic cooperation and economic arrangements. The European Union is the foremost example of successful regionalism.

• Empirical studies consistently show that the economic impact of straightforward

regional economic integration in Southeast Asia is relatively small. Even the formal arrangements in Southeast Asia (i.e. AFTA) have as their primary aim the further integration of member economies into global investment/production networks.

• When determining the quantitative impact of regional economic integration in

Southeast Asia, one could refer to studies that examine the impact of greater global integration. These studies generally show a net beneficial impact of globalization in countries of this region in terms of many indicators: aggregate welfare, poverty incidence, employment, wage volatility, nutrition, and child labor. However, the experience with the 1997 financial crisis underscores the risks of globalization.

• Greater regional and global economic integration did not seem to induce better

governance in Southeast Asia. On the contrary, it has been argued that the emphasis on international competitiveness and export promotion often supplanted explicit policy measures against poverty and social inequality

• Except for the variation in inflows of FDI to each country, the report does not

consider any evidence on whether greater global and/or regional economic integration has narrowed the development gap in Southeast Asia. However, there are clear indications that the benefits of greater economic openness have not been distributed equitably within countries. This is reflected in the relatively high and/or constant Gini indices of individual countries, the enclave nature of the export and manufacturing sectors in several countries, the deteriorating working conditions for women and workers in the informal sector, and the absence of social protection for unskilled temporary migrants. The relatively high inequality also reflects the likely outcome that ‘losers’ consistently outnumber the ‘winners.’

• The analysis has traced this inequality to the several factors: 1) the shortcomings

in social policy (e.g. absence of safety nets); 2) the gaps in macroeconomic policies (e.g. provision of physical infrastructure); 3) inappropriate approach to foreign direct investment; and 4) weak governance and institutions.

• It would be useful to study whether the income inequality within the countries can

help explain the slow economic convergence among them.

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• Greater global and regional integration can partly explain the relatively large

income inequality within countries of Southeast Asia and their lack of convergence since the whole process of greater economic openness is susceptible to the phenomenon that "when the market goes too far in dominating social and political outcomes, the opportunities and rewards of globalization spread unequally and inequitably—concentrating power and wealth in a select group of people, nations and corporations, and marginalizing others." This sentiment was expressed in the 1999 Global Human Development Report.

• The key message is that so-called ‘market forces’ cannot guarantee convergence.

Not only does government intervention at the domestic level have a role, but so do mechanisms at the regional level. These interventions stem from the theory underlying market failure, externalities, and the provision of public goods.

• National policies to broaden and deepen the impact of regional economic

integration fall into four broad categories: 1) expand the coverage and effectiveness of social policy; 2) improve the macroeconomic environment; 3) fine tune the approach to FDI; and 4) strengthen governance and institutions.

• In this context, regional cooperation can be useful in two aspects: First, it can

foster collective action among countries especially when international institutions (e.g. WTO and the IMF) fail to implement international rules fairly and effectively. Furthermore, regional cooperation can facilitate regional economic integration by engendering a stable regional macroeconomic environment—mainly through financial and monetary cooperation—and by helping countries achieve the critical threshold of development—primarily in terms of human resources and institutions—that is necessary to participate effectively in regional arrangements. Of course, regional cooperation has an intrinsic role in the process of regional economic integration: e.g. when countries agree to bring down barriers to the free flow of goods and factors of production. Second, regional cooperation directly contributes to human development when countries jointly address common economic and social concerns. The latter includes mechanisms to compensate the ‘losers’ in the process of regional economic integration and mechanisms to address common problems with regard to weak governance.

• Meanwhile, enhanced human development has a direct impact on regional

cooperation and regional economic integration mainly by improving the capability of countries to prepare, assess, and implement regional agreements. Higher human development can also attract better quality capital flows.

• ASEAN, the Asian Development Bank (ADB), and the various UN agencies have

initiated regional cooperation programs that are geared toward achieving all these aforementioned objectives. In particular ASEAN programs that address human development directly (ASEAN Plan of Action on Social Safety Nets, Initiative for ASEAN Integration, and various action plans) are deemed adequate. However,

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the pro-active role of the ASEAN Secretariat must be strengthened and funding sources must be enlarged to arrive at a viable source of funding for ASEAN cooperation on social development. Otherwise the programs may become fragmented. Closer coordination among bilateral and multilateral agencies must likewise be encouraged.

• ASEAN has instituted effective channels of regional cooperation with other

relevant agencies. One good example is the Joint ASEAN-World Bank Initiative on Mainstreaming Social Development (MSD). However, ASEAN has to develop more formal links with civil society organizations in order to enhance the latter’s role in regional cooperation.

• The various regional initiatives have displayed four basic commonalities which

are considered as positive future trends: greater awareness of the state, an increase in the number of players involved, a rising level of stakeholdership, and a shift towards a more holistic view of the process of regional cooperation.

• East and Southeast Asian states can consider a more structured approach to

regional integration—also known as regionalism—in order for it to be more effective, especially in terms of enhancing human development. In particular, Southeast Asia could adopt a region-based system of human rights which focuses on social concerns rather than first-generation human rights. It has been observed that what actually inhibits meaningful cooperation in ASEAN is the absence of shared interests among the member countries. One suggestion is the instrumental framing of issues as a means of altering the hierarchy of interests among the ASEAN member countries.

• In this context, the region-based system of human rights can be built on the

Millennium Development Goals and should be consistent with, and supportive of Bali Concord II which envisions an ASEAN Economic Community where there is "equitable economic development, reduced poverty and socio-economic disparities by the year 2020." A regional monitoring and peer review mechanism can also be established in order to enforce the system of human rights.

• Since a more structured approach to regional integration similar to that of the

European Union is politically not feasible in the near future—especially if the more viable East Asia region is considered—then more modest and workable arrangements should be encouraged. One promising area is the Japan-ASEAN comprehensive partnership agreements which explicitly address human resource development. Southeast Asian economies should also push for the agriculture sector to be included in any regional and multilateral trade arrangements since many studies consistently show that liberalization of the agriculture sector, particularly if developed countries are involved, benefits almost all countries in the region. The impact on poverty reduction is also substantial.

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• Regional cooperation should also cover areas that are important, particularly the issue of intra-regional migration. At present the ASEAN Framework Agreement on Services (AFAS) includes only relatively few sectors beyond GATS commitments. In particular, negotiations have largely excluded unskilled workers which have dominated migrant flows within Southeast Asia. Another area that has not been adequately considered is cooperation to resolve ethnic conflicts in the countries of the region.

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Figure I.2. Framework for Determining Relationship between Human Development Regional Economic Integration, and Regional Cooperation

R e g i o n a l C o o p e r a t i o n

Gre

ater

Reg

iona

l Eco

nom

ic In

tegr

atio

n (S

ingl

e-co

untry

or M

ulti-

coun

try P

ersp

ectiv

e) H

UMAN DEVELOPME

General Equilibrium: Income and relative prices

Trade Channel

Financial and Investment

Channel

Sectoral or

Trade Channel

Issue of Economic Convergence at Macro and Micro levels

MIMAP

Framework

Sustainability Empowerment Equity Productivity Accountability

‘Focused’

Financial and Investment Channel

SociaAspec

NT l

ts

Anecdotal/Quantitative Evidence with emphasis on Social Aspects

Winners and Losers

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