Introduction

Over the past years, the pattern and nature of interactions between economic agents has been increasingly recognized as an important factor for shaping the geography of regional economic performance. This chapter uses insights from this “relational turn” in economic geography and applies them to analyse regional performance in the Philippines. The chapter draws on empirical evidence from a study of an island province in the Central Visayas area of the country. The province of Cebu provides an interesting research area for an analysis of the influence of politico-economic relational networks on regional economic development, as it has experienced a strong emergence in the global marketplace that was influenced by networks of politico-economic relations. As this study shows, the politico-economic relational constellation of Cebu has a profound impact on the region's economic development trajectory.

Setting the scene: Cebu's shifting position in the global marketplace

The island province of Cebu is centrally located in the Central Visayas region in the heart of the Philippine archipelago. Its largest conurbation, Metro Cebu, is the main urban centre of the southern Philippines. It has emerged as a significant centre of manufacturing and service industries in the last two decades, attracting both foreign and domestic investment and producing for world markets. Outside the Manila area, it is the regional economy that is most associated with globalization and the “global shift” of industries to low-cost locations. As a result, Metro Cebu has emerged as a second node in the Philippines (after Metro Manila) with direct global connections — shipping, aviation, and telecommunications.

Cebu's economic profile is marked by three features that clearly distinguish it from other provinces in the Southern Philippines. The first is its size. As it is host to two-thirds of the Central Visayas’ total population, the regional economy generates approximately 70 per cent of its exports (Figure 3.1). This leading regional position can be related to Cebu's other two characteristics: its economic diversity and strong insertion in the global economy. Cebu's urban economy has a diversified economic base with manufacturing and service industries such as education, tourism and leisure, shipping, and IT-related industries as key economic pillars. With its international sea- and airport, many of these activities are oriented towards the global market.

Introduction

With economic reform and the opening up of the country to the global economy, China has witnessed the entry and vigorous growth of an array of globalizing industries. A recent account of China's electronics industry compiled by the Hong Kong Trade Development Council observes that “Massive relocation of the global electronics production over the last decades has turned China into a world electronics factory, producing more than a quarter of the world's total output in value terms. China is the world's major producer of end-consumer products including AV equipment, computers and mobile phones” (HKTDC 2011a, p. 1).

Concurrent with industrial transformation in structural terms, a geographical bifurcation has taken place. While domestically-oriented industries continued to be quite widely distributed across the country, new export-oriented industrial agglomerations have developed in the coastal areas. A substantial volume of research has provided insights into the patterns, drivers and effects of industrial geographies, as seen in the first half of the previous decade (He Canfei 2009; He Canfei and Wang 2012; He Canfei et al. 2008; Fan and Scott 2003; Thun and Segal 2001; Thun 2004; Thun 2006, Wei et al. 2007; Wang and Lin 2008; and Wang and Mei 2009; Wang 2010).

The distribution of domestically-oriented industries in China has often been linked to entrepreneurial local governments coming to the fore in the 1980s and early 1990s coupled with deepening decentralization processes. In particular, the coastal agglomeration of export-oriented industries has been linked to several phenomena. The first is the top-down fostering of territorial complexes in the form of special economic zones (SEZs) and industrial parks (Zeng 2010). This reflects national industrial policy and planning as a determinant of location and regional industrial development. This has allowed initial growth following the establishment of firms from outside. The second is bottom-up industrial development as specialized industrial districts (often labelled as “clusters”) developed through locally-born firms, institutionally supported by the local state (Wang 2010, see also Gereffi 2009). Third, again at the local level, the engineering of agglomeration economies undergirded the effective operation of SEZs. Thus, there is agreement that, since decentralization measures were enacted, the sub-national level has substantially gained significance vis-à-vis the national level.

INTRODUCTION

Over 20 years ago, in the fall of 1992, I published an article in Foreign Policy entitled “Japan Adrift”. As a friend of Japan, I warned that the post-Cold War era had created an uncomfortable geopolitical environment for Japan. I urged Japan to engage in fresh thinking and to change course. Sadly, my warnings were not heeded. Now, as a result of the failure to adapt over the past 20 years, Japan faces an even more difficult geopolitical environment. The goal of this essay is simple and clear: to save Japan from another 20 years of geopolitical drift.

In 1992, I began my essay with a Japanese folktale. Let me repeat it here: “A Japanese folktale tells of a young boy who lives in a coastal rice-farming village. One autumn morning, walking alone to work in the fields, he sees, to his horror, an approaching tsunami, which he knows will destroy the village. Knowing that he has no time to run down the hill to warn the villagers, he sets the rice fields on fire, sure that the desire to save their crops will draw all the villagers up the hill. The precious rice fields are sacrificed, but the villagers are saved from the tsunami” (Mahbubani 2005, p. 124). In this essay, I may make some inflammatory comments, but I hope my Japanese friends will understand that my goal is to help Japan.

In 2014, Japan will have to deal with not one tsunami but three. These three different tsunami will collide with one another and aggravate Japan's difficulties. The first tsunami is geopolitical. The new balance of power is working against Japan's interests. The second tsunami is political. At a time when Japan needs unified political leadership to cope with dramatic new challenges, the Japanese political system has never been more divided. The third tsunami is demographic. Japan has one of the fastest ageing populations in the entire world. Hence its relative “weight” in the international system will steadily decline. All these three great challenges will be discussed in detail in this paper.

Nonetheless, the conclusion of this paper is optimistic. Japan is not without options as it tries to steer a course in the 21st century.

Introduction

Industrial development in Vietnam is concentrated in the two main economic centres of the country, namely Hanoi, the nation's capital in the north, and Ho Chi Minh City, in the south. However, over the last 15 years, Da Nang, situated roughly in the middle of the country, has begun to emerge as an economic hub. A major port city and long a cultural centre, Da Nang has received significant amounts of investment in infrastructure, real estate, and tourism, and its industrial sector has begun to develop rapidly.

This chapter will examine the case of Da Nang and the challenges it has faced in its quest to become an important industrial centre. Following this introduction, the second section will examine how national-level policies regarding foreign direct investment have affected the distribution of industrial activity across the country. The third section will look at the recent development of Da Nang's industrial sector with specific reference to electronics. From there, the chapter will examine the case of Da Nang municipality, seeking to understand how local government authorities have sought to promote its industrialization. The fourth section will conclude.

Background: Regional Industrial Development and FDI in Vietnam

In 1986, the Vietnamese government implemented a series of sweeping reforms to move from a planned economy to one more open to market forces. In 1987, the Foreign Direct Investment (FDI) Law was approved by the National Assembly. This policy change opened up Vietnam to investment and spurred its industrialization process. This was taken further in 2005, with the introduction of the Investment Law that further facilitated foreign investment. And, with Vietnam's accession to the World Trade Organization in 2007, registered FDI increased even more rapidly. Thus, over the period 1988–2008, Vietnam attracted around 11,000 FDI projects with a total registered capital of US$164 billion (GSO 2008).

Presently, around 100 multinational companies have invested in Vietnam. Nearly 70 per cent of FDI is from Asia and over 60 per cent has been in the industrial sector. Overall, FDI in Vietnam's economy plays an important role in terms of contribution to GDP growth, total investment, and job creation. In 2008, the foreign-invested (FIS) sector contributed approximately one-fifth of GDP (Figure 6.1).

Introduction

Malaysia is a quintessential Little Tiger, one of a group of Southeast Asian countries that managed a transition from a predominantly agriculture-based economy to one with a vibrant manufacturing sector. Once known for its spices, tin, and rubber, Malaysia now has a diversified secondary sector comprising textiles, chemicals, steel, transport equipment, and other products. The electrical and electronics (E&E) sector has been at the centre of Malaysia's structural shift, accounting for the greater part of manufacturing employment, investment, and export earnings (Yusoff and Bhattasali 2008).

The country's E&E sector is essentially concentrated in three firm clusters. In the north, Penang houses market-leading semiconductor and industrial equipment multinationals; a number of contract electronics manufacturers; and many supplier firms, including some local firms with world-class capabilities in the process automation and technology provision sectors. The Klang Valley, comprised of Kuala Lumpur and the surrounding state of Selangor, has a large number of firms in the consumer electronics, semiconductor, and domestic appliance sub-sectors. Johor, in the south of the country, houses the third concentration of firms which includes a large number of contract electronics manufacturers, as well as consumer electronics and computer peripheral producers (Yoon 2013; Rasiah 2002; JSICID 2011).

Available comparative data shows that multinational firms carry out tasks of different intensity in the three locations, and local firms have differing levels of technological capabilities and network strength (Best and Rasiah 2003; Rasiah 2008). Thus, while providing important elements of an overall assessment, a uniquely national-level perspective does not explain these intra-national differences in firm dynamics and technological capabilities.

Given that Malaysia is a federation, with a central government and thirteen state counterparts, an examination of state agency and policies at the sub-national level may shed light on the differential development of each of these firm groupings. While Malaysia's constitution assigns the bulk of responsibilities and revenue sources to the federal government, state governments do carry out important tasks relative to economic policy in general and industrialization in particular.

Research carried out on Penang has documented how its state government and economic development corporation played a role in promoting the development of its electronics sector through implementing targeted investment drives; providing specialized infrastructure; making strategic investments to diminish risk; addressing market failures regarding skilled workers; and seeking to foster inter-firm linkages (Singh 2011; Hutchinson 2008; Rasiah 1999).

Introduction

A significant milestone of economic integration in the ASEAN region is the substantial progress in tariff liberalization, with the average tariff rate now at less than 5%. The achievement in tariff reduction, however, has been marred by non-tariff barriers (NTBs). While the commitment to eliminate NTBs has always been an integral part of the liberalization program of the ASEAN member states, little progress has been made to address them.

There are increasing concerns about NTBs. First, they have replaced tariffs as protective measures for domestic industries (World Bank 2008). Second, the bulk of intra-regional trade transactions among the ASEAN economies is driven by the global production networks of multinational companies in the region. Efficiency in moving goods across borders has thus become crucial in capturing and creating trade opportunities arising from the vertical and horizontal operations of these networks (Austria 2004). Third, behind-the-border interventions have increasingly emerged as the new form of protectionism since the recent global economic crisis (Wermelinger 2011). This is also observed with the shifting of growth potentials away from developed countries and toward developing countries.

NTBs could undermine the economic integration process and the realization of the AEC by 2015. Unlike tariffs, whose effect on trade is certain (i.e., direct effect will increase the price of imports), the effects of NTBs are ambiguous. They can be restrictive of trade, some may even promote it. Also, when they come in the form of regulatory measures, they may affect different products and different countries in different ways.

Given that the 2015 target for AEC is fast approaching, it is essential to examine closely the non-tariff issues affecting the economic integration of the region. The objectives of this chapter are as follows: (i) to identify and examine the non-tariff barriers affecting the integration of the priority sectors in the ASEAN region; (ii) to assess progress in the implementation of actions in the AEC Blueprint that are meant to address NTBs; (iii) to examine the possibility (or impossibility) of achieving the AEC by 2015; and (iv) to identify policy issues as well as make recommendations to address NTBs in the region.

As 2015 approaches, that year, at least in the more knowledgeable parts of the countries of the Association of Southeast Asian Nations (ASEAN), is increasingly associated with the creation of the ASEAN Community. After all, ASEAN's leaders had declared in 2007 “ASEAN's strong commitments towards accelerating the establishment of an ASEAN Community by 2015”.

In 2009, the leaders issued the Roadmap for the ASEAN Community (2009–15) containing blueprints for the ASEAN Economic Community (AEC), which they had adopted in 2007, and the Political-Security and Socio-Cultural Communities.

The AEC Blueprint comes with a matrix called “Strategic Schedule”, most of which lays down very specific measures to be taken in 4 two-year tranches until 2015. With the support and collaboration of the Asian Development Bank, the Institute of Southeast Asian Studies (ISEAS) engaged experts, most of them leading authorities in their fields especially with respect to ASEAN, to examine the prospects of the AEC's achievement by 2015, identify the domestic political obstacles to that achievement, and suggest policy measures to address them.

The experts found that, if the commitments were to be taken literally and at face value, and if the obstacles were to be taken into account, it would be very difficult for the AEC measures to be carried out by 2015. While the ASEAN vision of creating an economic community marked by the free flow of goods, services, foreign direct investment and skilled labor and the “freer flow of capital”, is far-sighted, courageous and ambitious, too much political opposition and inadequate institutional infrastructure lie in the way of their effective implementation.

However, if the measures in the AEC Blueprint are to be regarded as ASEAN aspirations and commitments pointing in the general direction of creating the region as a single market and production base, and if the year 2015 is to be seen as a benchmark of progress in that direction, the AEC 2015 should be taken seriously not only by the ASEAN states but also by businesses and by not-for-profit organizations.

It is in this spirit that we at ISEAS consider the findings and conclusions of the prominent experts whom we have engaged.

Japan has enjoyed amicable relations with the Association of Southeast Asian Nations (ASEAN) since it was granted Dialogue Partner status in 1977. But like other key partners of ASEAN, Japan has been from time to time constrained by other equally important foreign policy issues that might have obstructed the development of their bilateral relationship. Japan has undoubtedly invested its diplomatic energy overwhelmingly in its alliance with the United States, a foreign policy choice deemed imperative from Japan's strategic perspective. Japan lives side by side with historical enemies, China and South Korea, with China now emerging as a rising power. Its relationship with them is today shaped in part by renewed friendship as much as embittered historical memories. Japan has recently intensified territorial claims in the East China Sea against China and South Korea, even though the latter countries’ leaders attempted to strengthen relations with Japan. At one point, protests against Japan in various parts of China further deteriorated bilateral ties. Meanwhile, China's close ties with North Korea have affected the region's security outlook and at times worried Japan and South Korea. The March 2013 meeting between the vice ministers of defense of Japan and ASEAN disclosed a real concern over the tension on the Korean Peninsula, particularly after North Korea undertook its third nuclear test. In part, security concerns on the Korean Peninsula have dictated Japan's strategic considerations and thus legitimized the country's close cooperation with the United States. Such conditions have formed a certain viewpoint within Japan in regard to its approach toward regionalism, and in particular to its relations with ASEAN. Yet, it is imperative to note here that those conditions are not the only factors that explain the current state of ASEANJapanese relations. After all, ASEAN has remained important in Japan's Asia policy.

Japan's relations with ASEAN have been solid mainly because there were no outstanding disputes between the two sides, neither political nor economic. Successive Japanese governments have offered generous financial aid and technical assistance to a number of ASEAN countries as well as supporting Japanese conglomerates investing in ASEAN's markets. In retrospect, Japan's diplomatic activism toward Southeast Asia was seen in the mid-1960s but was more evident in 1977 following the announcement of the Fukuda Doctrine.

Executive Summary

Although the self-imposed deadline for the realization of the ASEAN Economic Community (AEC) is 2015, it should not be viewed as a hard target. One should not expect 2015 to see ASEAN suddenly transformed, its nature and processes abruptly changed, its members' interests substantially altered. Rather, 2015 should be viewed more as a milestone year — a measure of a work in progress — rather than as a hard target year.

Yet, ASEAN member countries did commit to carry out certain time-bound specific measures that are intended to lead to regional economic integration. While ASEAN should not be called to account for its members' failure to make good on their commitments, any failure to deliver will likely lead to a loss of credibility, putting member countries in danger of falling further behind in the global competition for export markets and Foreign Direct Investment (FDI).

The experts commissioned by the Asian Development Bank (ADB) and the Institute of Southeast Asian Studies (ISEAS) to write chapters on this matter express considerable doubt as to whether the specific measures committed to in the AEC Blueprint will have been carried out by 2015. One chapter notes ASEAN's failure to do away with NTBs. Another chapter cites the lack of progress in liberalizing intra-regional trade in services, which is becoming increasingly important in Southeast Asia. Still another attributes ASEAN's failure to recover its attractiveness to FDI to the region's inability, whether real or perceived, to integrate its economy. The chapter on competition law and Intellectual-Property Rights (IPR) protection in ASEAN concludes that, although “harmonizing” rules and enforcement measures relative to competition and intellectual property is important for bringing down trade barriers, such harmonization would both be difficult and time consuming. The chapter on subregional zones similarly observes that, although mutual confidence and functioning institutions are essential to transnational endeavors, they take time to build; however, subregional zones can help reduce development gaps and improve connectivity across national boundaries. The chapter on free trade agreements states that ASEAN “has no prospect of coming close to … (a) single market by the AEC's 2015 deadline — or even by 2020 or 2025”.

Introduction

The institutional structure supporting the ASEAN Economic Community (AEC) project remains limited. Despite the many suggestions proposed over the years for institutional strengthening, and despite ASEAN adopting a number of these proposals, ASEAN's institutional architecture for regional integration continues to emphasize political or discretionary approaches and little in the way of authority delegated to third parties or to the ASEAN Secretariat for enforcing compliance. ASEAN member states are well known for resisting any form of centralized authority to manage and complete the integration process. It is also important to recognize that this penchant for weak institutions, in fact, reflects weak preferences for integration or, at least, for particular aspects of the regional integration agenda. This means that any proposal aimed at reworking regional institutions to support integration must consider institutional designs that are politically feasible so that these will more likely be adopted by ASEAN governments. Ideally, institutions should also be crafted so that they can help to change national preferences in favor of a deeper commitment to regional integration that will, in turn, ensure timely and effective implementation.

This chapter explores how best to design regional institutions to enhance AEC implementation. It begins with a political economy account of regional integration in Section 2 that helps us understand the factors that drive ASEAN countries' national commitment to regional integration as well as those that hold back these same governments from fully implementing these commitments. By doing so, we are better able to appreciate the ASEAN aversion to strong, centralized institutions and the preference for flexibility in the way regional integration is designed. Section 3 draws on the political science literature to consider how institutions might theoretically be designed to support cooperative projects like economic integration; this section also reviews the various institutional mechanisms adopted in ASEAN to support the AEC project. Based on the preceding discussion, Section 4 provides some suggestions on how institutions in ASEAN might be re-designed to support the AEC process in the light of national and regional political realities.

The Political Economy of ASEAN Integration: Understanding ASEAN's Preference for Flexibility

Three features characterize ASEAN's approach to regional economic liberalization and integration, seen in both the AFTA project initiated in 1992 and the current AEC project. First, ASEAN governments have generally been forthcoming in initiating ambitious plans and programs on economic cooperation and liberalization.

Something interesting has happened to the Japan-ASEAN (Association of Southeast Asian Nations) relationship over the past 15 years.

Things had begun on a hopeful note. Japan took a series of initiatives in regional cooperation up to the 1997–98 East Asian economic crisis and did everything it could to help the crisis-hit countries. The ASEAN-Japan Summit was held for the first time in 1997 at the initiative of Prime Minister Hashimoto Ryutaro (1996–98), who announced that Japan would work closely with ASEAN to stabilize Asian currencies and the Asian financial market. Japan, under his leadership, also proposed to establish an Asian Monetary Fund to provide liquidity support for the crisis-hit countries. In 1998, Finance Minister Miyazawa Kiichi spearheaded an initiative to provide funds to reflate the crisis-hit economies, which led to the establishment of the Chiang Mai Initiative in 1999. The ASEAN-Japan Summit, which was institutionalized along with the ASEAN Plus Three (APT) in 1999, has been held every year since. In 2002, Prime Minister Koizumi Junichiro (2001–06) called for a Japan-ASEAN economic partnership agreement as a first step to building an East Asia community. The Japan-ASEAN Commemorative Summit was held in Tokyo in 2003 when Japan signed the Treaty of Amity and Cooperation (TAC). Japan, together with Indonesia and Singapore, played a crucial role in establishing the East Asia Summit (EAS) in 2005, which extended its membership beyond APT to India, Australia, and New Zealand. In the wake of the 1997–98 crisis, ASEAN Plus processes thus emerged as a major framework for regional cooperation, with ASEAN as the hub.

Subsequently Japan-ASEAN collaboration stagnated and Japan's profile declined in the region. There were domestic and regional reasons for the stagnation. With prime ministers changing practically every year from 2006–12 after Koizumi stepped down, Japan hardly took any important diplomatic initiatives concerning ASEAN. Japan's economic stagnation also led to the decline in its Official Development Assistance (ODA) and Foreign Direct Investment (FDI) to ASEAN. On the other hand, China has risen economically and hence in its power and profile in ASEAN. It has also taken its own initiatives in shaping the region, such as its FTA proposal, accession to TAC, and the Declaration on the South China Sea.

INTRODUCTION

ASEAN-Japan cooperation, through Japan's milestone doctrines that set the direction for regional cooperation, has positively affected ASEAN's efforts for regionalism, including the role of ASEAN-dominated processes like the ASEAN Regional Forum (ARF), ASEAN Plus Three (A+3), and the East Asia Summit (EAS) in enhancing cooperation. These processes contribute to addressing issues and challenges faced by ASEAN and the region, and provide new opportunities for ASEAN leadership in the 21st century. Japan's role in these processes, based on the “heart-to-heart” principles of the 1977 Fukuda Doctrine, served as a bridge, initially between the no-ncommunist ASEAN states and communist/socialist non-ASEAN mainland Southeast Asian states, and evolving gradually into constructive support for ASEAN's growth and development as the grouping's membership expanded. Japan has been most active under the A+3 framework, assisting the ASEAN countries in addressing emerging human security and development issues.

Japan has an important role in moving forward key regional processes with ASEAN. Through the ASEAN initiatives, which are complemented by sub-regional and bilateral collaboration, Japan is helping ASEAN members build national capacities to complement their regional commitments. Japan is also assisting the newer ASEAN members integrate fully into the ASEAN mainstream by sharing Japan's nation-building and development experience in areas such as economic modernization, democratization, governance, and accountability.

The recent policy statement by Prime Minister Abe on Japan's new foreign policy pillars, which focus on partnerships in the (East Asia) region for economic prosperity, provides the vision for this enhanced role in moving forward the ASEAN-Japan strategic partnership at many levels.

An important element in ASEAN-Japan relations is the integration of ASEAN's newer members, Cambodia, Myanmar, Laos, and Vietnam (collectively referred to as “CLMV”), into ASEAN. Since the 1990s, Japan has implemented focused policies and strategies to enhance the development of the CLMV to facilitate their integration into ASEAN. The Master Plan on ASEAN Connectivity provides fresh impetus to infrastructure development in the CLMV. Japan's participation in these processes takes several forms, including initiatives under the Greater Mekong Sub-region (GMS) program of the Asian Development Bank (ADB) and the Initiative for ASEAN Integration (IAI). Complementary to the IAI, the Mekong-Japan Economic and Industrial Cooperation Initiative provides another framework for Japan's partnership with the CLMV countries, to help develop the CLMV sub-region into an integrated destination for Japanese foreign direct investment (FDI).

Introduction

Since its inception in 1967, ASEAN has been an important regional association. It is active in promoting trade liberalization and political stability. ASEAN members have, through the years, signed several treaties to promote trade and investment activities in the region.

Of the numerous ASEAN legal milestones, the most significant and recent one is the ASEAN Charter. Its signing in 2007 coincided with ASEAN's 40th year of existence. The Charter adds to the legal infrastructure of the organization, including elements relating to dispute settlement. It is, however, by no means the only significant treaty of ASEAN, as a number of other agreements had already set up important legal commitments in the areas of trade and investment liberalization and integration.

ASEAN dispute settlement mechanisms deal with a variety of issues. By way of overview, this chapter begins by introducing major aspects of the dispute settlement system of ASEAN, pre-Charter and in light of the Charter. The chapter discusses briefly the over-arching dispute settlement mechanisms under the ASEAN Charter, after which it focuses on ASEAN's dispute settlement mechanisms for resolving investment and trade disputes. For the former type of dispute, the mechanisms are contained in more than one investment treaty, and these will be discussed. For the latter type of disputes, the key document which will be discussed is the Protocol on Enhanced Dispute Settlement Mechanism (“DSM”). Investment and trade dispute settlement mechanisms forms the main focus of this chapter, as they are key mechanisms supporting the ASEAN economic integration objective, and are therefore the most relevant to the efforts to accelerate the realization of the ASEAN Economic Community (AEC). Finally, the chapter makes a number of recommendations to improve these mechanisms and their support systems and to pave the way for their use if necessary in enforcing the various trade and investment liberalization commitments of ASEAN members in building the AEC.

Treaty of Amity and Cooperation

This milestone treaty was signed in February 1976 and is one of the earliest ASEAN documents with a dispute settlement mechanism. The Treaty was established with the following purpose:

One of its cornerstone principles is the settlement of differences or disputes by peaceful means. Articles 13 to 17 elaborate on how this principle is to be achieved.