Asean
Malaysia’s new links in the global economic system
Author: Shankaran Nambiar, MIU, Malaysia
The Najib government has given renewed focus to Malaysia’s international economic relations, including liberalisation and increasing interaction with the global economy.
This approach is understandable for a small, open economy that is particularly dependent on export-driven growth, and faces considerable pressure to attract FDI and increase its exports.
Malaysia no longer takes a rigid, narrow stance in choosing its economic partners — having decided not to confine itself to one particular global orientation, be it east or west — and is signatory to several FTAs through ASEAN. These include FTAs that ASEAN concluded with China, India, Australia, New Zealand, Japan and Korea. Beyond this, Malaysia has also entered into bilateral agreements with Japan, India, New Zealand and Pakistan.
The groundwork for many of these FTAs was laid before Prime Minister Najib Razak assumed office. But more recently — and more ambitiously — Najib appears to be the motivating force behind Malaysia’s participation in the Trans-Pacific Partnership (TPP) and the proposed EU-Malaysia FTA.
No cost-benefit analysis on these agreements has been placed in the public domain. But, given the inadequate state of Malaysia’s technological expertise, human capital, and production structure, Malaysia may not gain significant economic benefits. Also, the Malaysian economy would, presumably, accrue more substantial economic gains from the TPP and the EU-Malaysia FTA if they were implemented in conjunction with domestic reforms such as greater transparency and the emergence of a more market-driven economy.
Najib does seem willing to undertake at least some of the required domestic reforms. But to be effective the reforms must be radical, fundamental and stringent. At the risk of speculating, the improved human rights measures that Najib wants to introduce could also be a means of preparation for the TPP and EU-Malaysia FTA. Reform in other areas will be equally essential. Government procurement, intellectual property rights and the opening of the domestic financial market (as well as other services) will each have to be addressed. Hopefully, the government will also be nudged into fulfilling the state’s traditional role of providing citizens with greater access to education, health care, housing and a good public transportation system.
Najib seems to espouse an approach to international economic engagement that is global in vision and domestically oriented in reform. This is in line with his rhetoric of being ‘glocal’, whereby action in the global economic arena is rooted in domestic reform.
But Najib’s approach to global economic relations has also raised a number of questions and criticisms.
First, the attempt to forge links with economies as diverse as China, Pakistan and Chile can be criticised for lacking focus. A slower rate of global engagement might have been preferable, but the international race to conclude FTAs would have excluded Malaysia, had this strategy not been pursued. The government wanted to seize the opportunity to cast its net wider for overseas markets, and the 2008 crisis pushed Malaysia to explore such opportunities.
In effect, Malaysia may be seeking membership in a multiplicity of arrangements without any overarching strategy. But to define the objective of entering into an FTA as solely to secure more markets is naïve.
Second, the government has given a special priority to developing links with Islamic economies. The Developing 8 Preferential Agreement (with eight developing Islamic countries) and the Trade Preferential System among the Organisation of the Islamic Conference countries are two particularly relevant agreements that Malaysia has ratified in this regard. Sidelining economic relations with Islamic economies, even when the rationale is questionable, can evoke sensitivities among certain quarters of the policy community, but Najib has deftly sidestepped these issues and has forged ties as much with Pakistan as with China. It would, of course, be hugely myopic to ignore China or India in Malaysia’s international economic relations.
Najib’s strategy for global economic engagement has been criticised on several grounds, and as negotiations for the TPP and the EU-Malaysia FTA progress, opposition could mount. Nevertheless, early successes will put Malaysia in good stead to pursue a dual approach of increasing interactions with the global economy while implementing strong domestic reforms.
Shankaran Nambiar is Professor of Development Economics at Manipal International University.
An earlier version of this article was published in the Edge Financial Daily.
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Malaysia’s new links in the global economic system
Asean
ASEAN weathering the COVID-19 typhoon
Author: Sandra Seno-Alday, Sydney University
The roughly 20 typhoons that hit Southeast Asia each year pale in comparison to the impact on the region of COVID-19 — a storm of a very different sort striking not just Southeast Asia but the world.
Just how badly is the COVID-19 typhoon thrashing the region? And what might the post-crisis recovery and reconstruction look like? To answer these questions, it is necessary to investigate the strengths and vulnerabilities of Southeast Asia’s pre-COVID-19 economic infrastructure.
Understanding the structure of the region’s economic house requires going back to 1967, when Southeast Asian countries decided to pledge friendship to one another under the ASEAN framework. While other integrated regions such as NAFTA and the European Union have aggressively broken down trade barriers and significantly boosted intra-regional trade, ASEAN regional economic integration has chugged along slower.
Southeast Asian countries have not viewed trade between each other as a top priority. The trade agreements in the region have been forged around suggestions for ASEAN countries to lower tariffs on intra-regional trade to within a certain range and across limited industries. This has lowered but not eliminated barriers to intra-regional trade. Consequently, a relatively significant share of Southeast Asian trade is with countries outside the region. This active extra-regional engagement has resulted in ASEAN countries’ successful integration into global value chain networks.
A historically outward-facing region, in 2010 around 75 per cent of Southeast Asian commodity imports and exports came from countries outside of ASEAN. This share of extra-regional trade nudged closer to 80 per cent in 2018. This indicates that ASEAN’s global value chain network embeddedness has deepened over time.
Around 40 per cent of ASEAN’s extra-regional trade is with the rest of Asia. From 2010 to 2018 Southeast Asian countries forged major trade relationships with four Asian countries: China, Japan, South Korea and India. Outside Asia, the United States is the region’s major trading partner. ASEAN’s trade focus on Asia’s largest markets is not surprising. Countries tend to establish trade relationships with large, geographically close, and culturally similar markets.
Fostering deep relationships with a few large markets, however, is a double-edged sword. While it has allowed ASEAN to benefit from integration in global value chains, it has also resulted in increased vulnerability to the shocks affecting its network connections.
ASEAN’s participation in global value chains has allowed it to transition from a net regional importer in 1990 to a net regional exporter in 2018. But the region’s deep embeddedness in a small and tightly-coupled network cluster of extra-regional global value chain partners has exposed it to disruption to any and all of its external partners. By contrast, ASEAN’s intra-regional trade network structure is much more loosely-coupled: a consequence of persistent intra-regional trade barriers and thus lower intra-regional trade intensity.
In the pre-COVID-19 period, ASEAN built for itself an economic house held up by just five extra-regional markets, while doing less to expand and diversify its intra-regional trade network. The data shows that ASEAN trade became increasingly concentrated in these few external markets between 2010 and 2018.
This dependence on a handful of markets does not bode well for risk and crisis management. All of the region’s major trading partners have been significantly affected by COVID-19 and this in turn is blowing the ASEAN economic house down.
What are the ways forward? The immediate task at hand is to get a better picture of the region’s position in global value chain networks and to get on top of managing its network risk exposure. Already there are red flags around the region’s food security arising from its position in food value chains. It is critical to look for ways to introduce flexibility into existing supply chains for greater agility in responding to crises.
It is also an opportune time for ASEAN to harness the technology transfer gains of global value chain participation and invest in innovation-driven diversification of products and markets. The region’s embeddedness in global value chain networks certainly places it in a strong position to readily access large export markets not just in Asia but also Europe and the Americas.
Over the longer term, ASEAN is faced with the question of whether it should seriously look…
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