TCS Daily

Looking Past the Tsunami to the Rest of Asia's Challenges... and Promises

By Rowan Callick - January 7, 2005 12:00 AM

The awful aftermath of the Boxing Day tsunami will preoccupy much of south and east Asia for many months. But although the countries whose coastlines have been devastated are for now forced to turn in on themselves, in time they will also be looking around at their neighbours with the empathy that comes from shared suffering, inflicted on Muslim, Buddhist and Hindu communities alike.

The countries of the Asia-Pacific region were already, before the tragedy struck, starting to identify what they have in common, and what they stand to gain by working together more closely, especially economically but also in security arrangements that incorporate their response to emergencies.

The regional attacks by Islamist terrorists through the last three years have also played a part in building an Asian security infrastructure - with those most under threat also, by coincidence, those which suffered most from the tsunami.

For the Asia-Pacific nations, 2004 was a year of elections which have set the region up for its emergence, at last, as an economic unit to rival those of North America and Europe. The election outcomes have reinforced leadership trends which present a unique opportunity for the countries of the neighbourhood to build an alliance that their ideological and cultural diversity, and barriers of history, have long prevented.

For the region is set for an extraordinarily stable political period during which the leaders of China, South Korea, Japan, India, Vietnam, Taiwan, Thailand, Singapore, Malaysia, Indonesia, the Philippines, Papua New Guinea and Australia are now likely to remain the same through the next three years or so. There are bound to be mishaps that may trip one or two prime ministers or presidents, but a formidable quorum will remain of leaders who have got to know each other well, and who share a range of values, principally economic liberalisation.

China will be driving this process through to the next summit, in Kuala Lumpur in late 2005, of the great powers of north Asia - China, Japan and South Korea - and India, with the ten members of the Association of South East Asian Nations. Australia and New Zealand are also almost certain to be at the table, as they were at the last summit in Laos in November. This is the meeting that will mark the historic start to the process of building an East Asian economic community which will in time pull together the diverse free trade agreement strings that are already criss-crossing the region and bringing countries closer.

Richard Martin, director of Sydney based business analysts IMA Asia, says: "The Asean-centred FTAs should eventually help create a better commercial logic for south east Asia's relatively small markets... (But) despite Asean's early leadership in the FTA whirl, China is now in the driving seat."

The American preoccupation with the Middle East, and the European challenge of assimilating its new community members formerly from the eastern bloc, will help foster this process by reinforcing the growing sense of Asian leaders that they have to create their own future, together.

What does this forthcoming Chinese Year of the Rooster hold in store for the principal Asia-Pacific countries, as they prepare to embark on their great regional adventure?

Martin says: "With elections out of the way, oil prices and inflation easing, interest rate hikes postponed, and still modest growth in exports and industrial production, we expect to see a steady lift in business and consumer sentiment that should underpin good consumption and investment levels."

The Asian Development Bank's new estimate of non Japan Asian growth for 2005 is 6.3 per cent. Perversely, and cruelly, the impact of the tsunami will be most likely to drive this figure up, due to reconstruction activity.

Little progress was made during 2004 towards resolving one of the region's big three security concerns: defusing North Korea's threats as an emerging nuclear power and as a rogue arms supplier to terrorist groups. Washington has entrusted the leading role in defusing Pyongyang to China. Success this year would reinforce Beijing's rise to regional dominance.

The second major security anxiety, conflict between Taiwan and China, has been defused by the sophisticated voting of the Taiwanese at December's parliamentary elections, giving a slender majority to the cautious "pan blue" opponents of President Chen Shui-bian.

The third regional security challenge is the continuing threat of Islamist extremists, whose aim is the collapse of the south east Asian nation states and their replacement by a regional theocracy. Greater regional cohesion is needed to combat these patient terrorists effectively.

And a new, or revived, issue is emerging with the potential to stymie the moves this year towards an East Asian community. That is the growing antipathy between China and Japan. This mildly suits the domestic needs of the leaders of both countries, for whose politics nationalism is a prime recruiting agent. But this feud is now moving beyond rhetorical flourishes.

What else lies in store for the principal countries if the region? Here are some forecasts.

China: Will maintain its process of gradual currency adjustment, to let the yuan appreciate by up to 5 per cent against the weakening $US in which it holds its vast reserves. Will cool its overheating with further small interest rate rises, but still grow at 8 per cent. Some "soft landing."

Japan: Will continue to recover economically, if stutteringly, while responding with increased assertiveness to China's growing regional dominance even as the two economies become steadily more interdependent. The Bank of Japan will start intervening again to prevent the yen establishing itself at below 100 to the $US.

South Korea: The neophyte President Roh Moo-hyun and his left-leaning Uri Party inherited an economy in which domestic confidence had slumped, and will in 2005 attempt a "New Deal" stimulus package of state funded infrastructure. Citigroup, dubious about its success, expects a gdp growth decline from 4.6 per cent in 2004 to 3.3 per cent in 2005.

Hong Kong: Will continue to revive economically, driven by the finance, business services and tourism sectors, with gdp growth around 5 per cent. This will happen despite its lame-duck political leadership, with chief executive Tung Chee-hwa being publicly criticised by his boss, China's President Hu Jintao, on December 20. A stronger yuan and weakening, $US-pegged $HK, will benefit Hong Kong.

Taiwan: The narrow "pan blue" victory in the parliamentary election in early December helps defuse the prospect of heightened cross-straits tension with China, exacerbated by the earlier re-election of "pan-green" President Chen Shui-bian. Economic progress depends heavily in 2005 on whether the pan-blue Kuomintang (Nationalist) party will seek common ground with a now chastened Chen, or will continue to reject all government legislation. If the former, growth may exceed 5 per cent.

India: The welcome continuity in economic liberalisation through a change of government will be tested as the left wing parties in the governing coalition start to test their capacity to mould policy. A key test will come with moves to open the banking and retail sectors to foreign investors. Strong growth of more than 6 per cent is likely.

Thailand: Populist Prime Minister Thaksin Shinawatra and his Thai Rak Thai (Thai Love Thai) party will win the election in February at a canter, despite - or possibly because of - his tough approach to the Muslim insurgency in the south. The baht will continue to appreciate. Growth will moderate, as elsewhere in the region, but will still manage a handy 5.7 per cent or so.

Singapore: More of the same can be expected under new Prime Minister Lee Hsien Loong, an accomplished technocrat (and son of former prime minister Lee Kuan Yew) who has initiated cautious economic reform, opening doors to the genuine private sector that have long been guarded by the state - including Government Investment Corp funds. As elsewhere in the region, the government will seek to respond to cooling exports by boosting the domestic market, with Asian banks now fully recovered from 1997 and ready to lend.

Indonesia: The recent election of Vice President Jusuf Kalla as chairman of Golkar, the biggest party in the 550 seat parliament, with 23 per cent of the members, opens the door to the prospect of overdue economic reforms that will turn around the country's calamitous loss of investment. This provides new President Susilo Bambang Yudhoyono with the capacity to demonstrate he is indeed the decisive, open minded leader whose image appealed strongly to Indonesians electorally. Business, after a rough decade, appears confident he can and will do so, helping boost growth forecasts as high as 7 per cent.

Malaysia: The landslide election of Abdullah Badawi and the release from prison of Anwar Ibrahim have changed, and defused, the previously often overwrought political atmosphere. The economy has also benefited from a greater sense of relaxation and confidence, and domestic demand will remain firm in 2005. Business is expecting the government to cash in on its popularity by implementing overdue economic reforms - though it is unlikely to de-peg the ringgit from the $US until China does the same with the yuan.

Philippines: Re-elected President Gloria Arroyo knows what needs to be done, but appears to lack the will or the capacity to introduce measures to restore investment. The big test in 2005 will be whether she can sell power utility Napocor to an operator which can show the way in delivering the services whose constant breakdowns constrain business prospects. Growth predictions range up from Citicorp's modest 4.3 per cent.

Rowan Callick is Asia-Pacific editor of The Australian Financial Review.


TCS Daily Archives