Lecture 10 - ASEAN regional economic integration

Lecture: ASEAN regional economic integration: Southeast Asia as a business environment
Erja Kettunen-Matilainen
Helsinki School of Economics

Article: The regional economy: Looking forward by looking back
Malcolm Cook, In: Southeast Asian Affairs 2008, Singh D and Than T M M (Eds), Singapore, 2008

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The lecture presented an overview of regional integration via ASEAN and the ASEAN Free Trade Area (AFTA), with some comments on foreign direct investment (FDI) and its role in the economies of SEA countries. The lecture was clearly structured and easy to follow. The main conclusions were:

1. Despite the diversity – culturally, historically and as regards trade and economic policies – regional economic cooperation and a considerable degree of integration has been achieved.
2. FDI has been a driver for growth, although since the Asian Financial Crisis of 1997 competition for FDI from China has remarkably increased.

The lecture avoided tricky issues such as whether FDI (in which control resides with the foreign company) and the major role of multinational enterprises (MNEs) is a form of neo-colonialism; or to what extent the inflows of FDI lead to concentrations of power and are detrimental to democracy. The question of working conditions, particularly of sub-contractors to MNEs, was also not discussed. Neither was the role of the Chinese communities in SEA business.

Implicit in the lecture was the idea that liberalization is always a good thing (for trade presumably based on Ricardo’s theory of comparative advantage) yet the immediate negative social impact of the Asian Financial Crisis was less disastrous in Malaysia, which under Mahathir ignored IMF advice, than in Thailand and Indonesia, which followed IMF instructions for greater liberalization, privatization, and a reduction of government intervention in the economy. It seems that economic intervention might reduce economic efficiency yet be better for equality and society as a whole. Interestingly, US policy in the current global financial crisis, triggered by irresponsible lending leveraged by incomprehensible innovative financial instruments, echoes that of Mahathir in 1997 – support for ailing industries, support of financial institutions in difficulties (recapitalization with government money), running a massive public debt etc. Dr M., true to his combative style, has not been reticent in enjoying a bit of schadenfreude.

One side-effect of the travails of US-style economics is that economic policy norms are being questioned. An area that is of interest is Islamic finance, in which Malaysia is a world leader. Worldwide, the Islamic banking sector has grown considerably, for reasons unrelated to the current crisis, and its more vociferous proponents claim that the world economy would not be in such a mess if the financial system had followed Islamic banking principles. In view of the large number of Muslims in the world, Malaysia might be positioning itself to challenge Singapore for the position as leader in finance in SEA.

A noteworthy aspect of Islamic finance is, in my opinion, that economic and finance policy is being re-connected to moral and political values. In recent years it has been fashionable for finance and economics to be taught as ‘scientific’ and somehow amoral. Although South Asians and not Southeast Asians, Nobel Prize winners, Amartya Sen (Nobel Prize in Economics) and Muhammad Yunus (an economist who received the Nobel Prize in Peace) show how Asian approaches can help redirect economics.