Authors: Maria Monica Wihardja, CSIS, and Reza Siregar, AMRO
Tremendous progress has been made toward achieving the 1994 APEC Bogor Goal of an integrated region of free and open trade and investment by 2020.
Despite some sensitive sectors (such as the agriculture sector), APEC’s most favoured nation average tariff had fallen to less than 6 per cent as of August 2012.
Meanwhile, the global economy has undergone significant changes since 1994. For the past two decades, China has grown at an almost incredible rate and is now the second-largest economy in the world. As China has grown the geographic concentration of manufactured exports has shifted toward East Asia. The manufacturing process itself has become ‘fragmented’ or ‘disintegrated’ as countries specialise in the production of small components that are distributed across a number of economies before being assembled into a finished consumer product. At the same time the global financial sector has become more integrated. For example, banks from Malaysia and Singapore, including CIMB, DBS and OCBC, are transforming themselves into world players.
While greater regional integration has tremendous benefits, it also brings considerable risks. Today, when a country changes its domestic monetary policies it influences the banking activities of other economies globally because banking sectors can no longer be separated across developed and developing markets. That ostensibly local problems can have global effects is especially clear right now. The euro zone area is struggling to deal with its sovereign debt crisis and still poses a big threat to world economic stability. Although the United States avoided going over the fiscal cliff — the term given to congressionally mandated tax increases and spending cuts that were due to kick in on 1 January — some still fear that the deal brokered on the eve of 2013 is merely a temporary solution and that the country will be back on the same precipice soon. And quantitative measures employed by the US Federal Reserve have led to massive inflows of capital into Asian economies, further complicating the management of liquidity and exchange rate policy in recipient markets. In this context it is only natural for many countries, including members of APEC, to resort to economic nationalism and trade and investment protectionism.
Many observers have criticised APEC for losing its focus as it deals with this difficult economic environment. APEC’s main goal should still be to increase the living standards of its members, but if the forum is to regain its momentum in 2013 it also needs to focus on short-term problems. As chair, Indonesia’s main task is to balance short- and medium-term troubleshooting with a more visionary approach for the future.
Against this background, Indonesia has made the theme for this year’s APEC Summit ‘Resilient Asia-Pacific, the Engine of Economic Growth’. Foreign Minister Marty Natelagawa says the Indonesian chairmanship will focus on three priorities: ‘attaining the Bogor Goals, achieving sustainable growth and promoting connectivity’. Among a number of key initiatives, Indonesia will propose that an APEC-wide ‘Infrastructure Investment Framework for Connectivity’ and ‘APEC Guidelines on Delivering Bankable Projects’ be endorsed by APEC economies.
These initiatives are indeed timely. Yet implementing them will require sustained and stable financing, which can only exist if global financial markets are sound and healthy. That, in turn, requires institutions to be regulated by consistent rules across the world. Otherwise, as the recent financial crisis demonstrates, regulatory inconsistency could lead to unsustainable financial activities.
So the success of Indonesia’s initiatives will depend on strong international financial regulation. As chair of APEC in 2013 and a member of the G20, Indonesia has the capacity to lead financial regulatory reform.
In his 2007 paper ‘Microeconomic Policy Reform: Strategy for Regional Cooperation’, Hadi Soesastro cautioned that ‘economic well-being and domestic competitiveness are influenced not only by openness to trade and competition but also by the region’s regulatory and structural architecture’. The Asia Pacific looks to be doing well on the former criterion; but as for the latter, ‘second-generation economic reforms’ have yet to be completed. There are still many behind-the-border barriers to trade, such as the protection of sensitive sectors and institutional or regulatory deficiencies. Amid present global market uncertainties, APEC members need immediate, tangible measures to address those deficiencies in order to safeguard their economies from shocks. Without such protections, the 1994 Bogor Goal may not be realised. The ‘APEC New Strategy for Structural Reform’ is welcome in this respect, as is Indonesia’s pledge for regulatory and bureaucratic reform.
Over two decades the 1994 Bogor Goal has been an invaluable road map for APEC and it will remain relevant for years to come. Still, as Indonesia assumes the 2013 chairmanship it has a fresh opportunity to expand APEC’s vision. Sometimes, though, looking to the future means keeping an eye on the problems of the present.
Maria Monica Wihardja is a researcher at the Centre for Strategic and International Studies, Jakarta, and a lecturer at the Department of Economics, University of Indonesia. She is also Associate Editor at the East Asia Forum Indonesia desk.
Reza Siregar is Senior Economist at the ASEAN+3 Macroeconomic Research Office, Singapore.