In the autumn of 2011 I proposed a joint study on ASEAN-Japan relations to Ambassador K. Kesavapany, then director of the Institute of Southeast Asian Studies (ISEAS), and Professor Takashi Shiraishi, president of the Graduate Institute of Policy Studies (GRIPS). They gave their consent to my proposal. Ambassador Tan Chin Tiong, director of ISEAS, added his support to the project.

The objectives of the proposed joint study were to re-examine and critically analyze relations between ASEAN and Japan and to give future perspectives and directions. I was of the view that despite its importance, the ASEAN-Japan relationship had been undervalued and overlooked on both sides in recent years. In this respect, however, I am happy to observe that there has been a favorable change, especially since Shinzo Abe came back to power as prime minister of Japan in December 2012. He is focusing on ASEAN as one of the pillars in his foreign policy.

To implement the joint study, Professor Shiraishi and I tried to recruit competent contributors not only academics but also practioners from ASEAN and Japan to cover various fields such as foreign policy, security, business, development assistance, and fiscal cooperation and to shed light from different angles. We are grateful that Professor Tommy Koh, ambassador-at-large at Singapore's Ministry of Foreign Affairs, Professor Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy, and Rodolfo Severino, former ASEAN secretary-general, accepted our request to contribute.

I acknowledge the support of the Japan Foundation, which provided the grant for the publication of this monograph. I would like to express my appreciation also to six generous donors to the project: Mitsubishi Corporation, Mitsui, Sumitomo Corporation, Itochu Corporation, Marubeni, and Sojitz Corporation.

I am indebted to Sunandini Arora Lal, Wee Wong, and Dr. Motoko Kawano of GRIPS for their painstaking efforts at editing this monograph.

Last but not least, I thank Professor Shiraishi, co-editor of this monograph. Without his distinguished expertise and extensive network, this publication would not have been possible.

Introduction

At an intensifying pace over the past generation, Thailand's structure of production and, in particular, its export profile has been shaped significantly by a relatively small group of firms in the electronics industry. When foreign multinational assemblers began to produce new electronic products in Thailand 20 years ago, it was conventional to think of the challenges of catch-up industrialization, at least in part, in terms of a particular national economy finding means to implicate itself to its advantage within a global division of labour. While that perspective remains meaningful, today, as a result of the increasing “fragmentation” of production, we might better think of the goals for a national economy in terms of finding advantageous positions in multinational firms’ global (in the case of the electronics industry, this increasingly means East Asian) value chains.

The implications of the new global geography of production can be seen in the differential rates of economic growth within Thailand. In recent decades, traditional secondary urban centres such as Chiang Mai and Had Yai have grown relatively slowly. In contrast, its Eastern Seaboard provinces have come from nowhere in the 1980s to become Southeast Asia's most important concentration of mostly heavy industry manufacturing (Webster 2006; Unger 1998).

Thailand has been highly successful at embedding itself within the East Asian regional production strategies of major electronics producers. However, the potential positive dynamic effects, namely, the spillovers flowing from that success have been more modest than we might expect. We explore possible explanations for this mixed record below and point to indicators that some Thai state agencies are becoming more successful in supporting the electronics industry than in the past.

What are the means available to political jurisdictions to attract the attention and, ultimately, commitments from the major firms that define the geographic contours of the different segments of the global electronics industry?

These means include the conventional ones of maintaining stable macroeconomic conditions and providing a favourable business climate. Also important, of course, is the quality of physical infrastructure as well as the cost and skills of the labour force. In addition to these more straightforward factors that foreign firms weigh in deciding where to establish production facilities, there are variables that are specific to particular industries engaged in cross-border fragmented production.

When the ASEAN Secretariat approached the Asian Development Bank to undertake an analysis of the barriers and impediments in realizing the ASEAN Economic Community by 2015, we were delighted to respond positively, given the importance of the issue and the strong ties between our institutions. We were also delighted to collaborate with the Institute of Southeast Asian Studies to produce this volume, enlisting the support from external experts in the field. With the publication of this book some 2 years before the deadline of 2015, we hope and expect that policy-makers and other stakeholders will have sufficient time to address the issues raised, and meet the challenges identified.

A key message coming out of this volume is that the target date of 2015 should not be viewed as a hard deadline but rather a milestone, albeit important, in a much longer journey. It is a journey that began in 1967, although during its first decade the primary focus of ASEAN was on creating harmony and cohesion within a troubled region, rather than increasing economic integration. But pursuing regional economic integration has gained prominence in ASEAN affairs over succeeding decades. From the initial focus on trade liberalization, through the Preferential Trading Arrangement and eventually the ASEAN Free Trade Agreement (AFTA), ASEAN's regional economic integration agenda has broadened to now include services trade, investment, labor migration, and even macroeconomic policy. ASEAN's regional economic integration efforts are meant to culminate in the creation of an ASEAN Economic Community, one of the three pillars of the ASEAN Community espoused in ASEAN's Vision 2020 — the other two being the Political-Security Community and the Socio-Cultural Community.

Whatever is realized come 2015, the work must continue beyond it. ASEAN's own assessments, based on its scorecards, suggest that many of the targets will not be met by this date. The challenges identified in this volume support this conclusion. But more importantly, the agreements that have been signed, before and after this date, must be implemented legitimately. Often effective implementation will require domestic rules and regulations to be amended in order to accommodate the agreed protocols. Monitoring at this stage is often guided by little more than goodwill, and this too poses obvious challenges. Therefore, it is critical that member countries are convinced that the reforms that they agree to will be in their self-interest.

ASEAN leaders have proclaimed their intention to create an ASEAN Economic Community (AEC) by 2015. The AEC, along with two other “pillars” — the ASEAN Security Community and the ASEAN Socio-cultural Community — make up the ASEAN Community, as declared in Bali Concord II of 2003. The last 5 years have witnessed various steps taken to speed up and strengthen community building: (a) bringing forward the date for meeting the goals of Vision 2020 to 2015, (b) ratifying the ASEAN Charter, (c) implementing the AEC Blueprint, and (d) adopting blueprints for the Socio-Cultural Community and the Political Security Community.

Yet, despite the various ASEAN initiatives toward economic integration, progress has been slow. Non-tariff barriers such as restrictive regulations and technical measures have not been removed. Negotiations to free up trade in services need to be accelerated. Thus, although ASEAN is a market of 600 million people, the region, in reality, remains a chain of disparate markets. Intra-regional trade currently makes up only about one-quarter of ASEAN's total trade volume, compared to more than 70% in the European Union. More importantly, a wide economic disparity divides the ASEAN–6 (Malaysia, Indonesia, Singapore, Thailand, Brunei Darussalam and the Philippines) from its four newer members (Cambodia, Lao PDR, Myanmar, and Viet Nam), which is a major hindrance to economic integration.

To address the issue of the economic divide, there are several programs on “hard” and “soft” infrastructure being initiated at the regional and subregional levels. For example, the Initiative for ASEAN Integration (IAI) aims to narrow the divide within ASEAN and enhance ASEAN's competitiveness as a region. In 2010, ASEAN also came up with the Master Plan on ASEAN Connectivity, which identified strategies and specific actions to speed up regional connectivity in three areas: physical connectivity, institutional connectivity and people-to-people connectivity that is intended to help in bringing about a smoother flow of trade in goods, services, investment and people in the region. The subregional programs, like the Greater Mekong Subregion (GMS), the Indonesia-Malaysia-Thailand Growth Triangle (IMT-GT) and the Brunei Darussalam–Indonesia–Malaysia–The Philippines East ASEAN Growth Area (BIMP-EAGA), aim to strengthen economic linkages between member countries. They also promote the economic integration of the region; assist in the construction of physical linkages among countries; and promote the fairer utilization of limited resources in the subregion.

INTRODUCTION

The Japan-ASEAN (Association of Southeast Asian Nations) partnership has a long history, beginning in the early 1970s. Japan began to have an informal dialogue with ASEAN in 1973 in order to resolve trade frictions over synthetic rubber. Prime Minister Takeo Fukuda proposed the Fukuda Doctrine and stressed the necessity of “heart-to-heart”, “person-to-person” understanding when he was invited to the second ASEAN Summit in Kuala Lumpur in August 1977. Japan played an important role in the process of trying to find a resolution to the prolonged internal conflict in Cambodia, and contributed to reconstructing the country. After the 1997–98 Asian Financial Crisis, Japan's presence was evident in the various projects and plans to help crisis-hit countries overcome their problems as well as revitalize their economies. For example, the New Miyazawa Plan (1998), which was a package of financial assistance directed toward Thailand, Malaysia, the Philippines, the Republic of Korea (ROK), and Indonesia, was financed by Japan. In the early 1990s, Japan and ASEAN institutionalized the Meeting of ASEAN Economic Ministers and Minister for International Trade and Industry (AEM-MITI). AEM-MITI focused on economic cooperation between ASEAN and Japan, including assistance for Indochina (Vietnam, Cambodia, and Lao PDR) and Myanmar, with the aim of supporting these countries’ aspirations to be members of ASEAN. In addition, economic ministers of ASEAN countries and Japan agreed to establish the Cambodia-Laos-Myanmar Working Group, which aimed at narrowing the developmental gap in Southeast Asia, at the AEMMITI meeting held in September 1994. ASEAN economic cooperation actually began with an agreement between ASEAN economic ministers in 1992 to establish the ASEAN Free Trade Area (AFTA). After this, Japan-ASEAN industrial cooperation started encouraging greater integration and development in Southeast Asia. The Japan-ASEAN partnership carried a heavy weight for ASEAN countries because of Japan's position as the second-largest economic power in the world.

However, several new trends in East Asia since the beginning of the 21st century led Japan to rethink and reconstruct the Japan-ASEAN partnership. The rise of China, the acceleration of ASEAN integration, and the rapid development of ASEAN-centered regional architecture transformed economic circumstances in East Asia. These trends are interconnected with each other and have transformed the regional economic landscape of East Asia, significantly changing the character of the Japan-ASEAN partnership.

Introduction

Path-breaking changes in electronics technology in general and microelectronics in particular have given birth to the Information Technology (IT) revolution and its related innovations. In the closing decades of the last century, the IT revolution facilitated not only technological changes, but also far-reaching institutional changes as seen through deepening globalization processes (Soete 2006).

Perhaps there is no other region like East Asia, which took advantage of the microelectronics revolution and rise of export-oriented production, preludes to today's IT revolution and globalization. A considerable body of work indicates that outward-oriented economic policies, accompanied by a catalytic role for foreign firms and targeting of global production networks within a context of activist state policy has been at the core of the East Asian Miracle (Ernst and Kim 2002; Rodrik 1992; Sen 1983). Drawing inspiration from the development experience of Southeast Asian countries, many less developed countries, especially in Asia, are striving to promote industrial transformation by developing their electronics and IT production base and promoting the use of IT. The moot question is “How rocky is the road ahead for these countries?”

As globalization processes and the IT revolution gained momentum, there were significant changes in the organization of electronics production that led to the establishment of Global Production Networks (GPN), which later evolved into Global Innovation Networks (UNCTAD 2005). This was facilitated to a great extent by the formation of the World Trade Organization, which led to the widespread dismantling of barriers to trade and investment. For IT goods, this was further accentuated by the Information Technology Agreement (Joseph and Parayil 2008).

These developments also encouraged Outward Foreign Direct Investment (OFDI) from developing nations, such as China, India and other countries, with a view to further strengthening their technological capabilities and enhancing their market access (Pradhan 2004; Kumar and Chadha 2009). The process of trade and investment liberalization was further accentuated with the establishment of a multitude of regional trading agreements (UNCTAD 2004). One notable case with regard to electronics has been the e-ASEAN Framework Agreement, which involved liberalized trade and investment on the one hand and capacity-building on the other (Joseph 2006).

All these processes resulted in an unprecedented rate of increase in trade and investment between countries in the South in general and Asia in particular (UNCTAD 2005b).

Introduction

North Brabant is a province located in the south of the Netherlands, bordering Belgium. It is the third most populated province of the Netherlands, with 2.4 million inhabitants and home to several medium-sized cities such as Eindhoven, Breda and Tilburg. It is one of the more wealthy provinces in the country with an estimated GRP per capita of €35.665 in 2011 (ING 2011). This is lower than in the western provinces of the Netherlands, where cities such as Amsterdam and Rotterdam are located, but is higher than many other provinces in the Netherlands. It has a relatively low unemployment rate of 5.3 per cent (2010), and relatively high labour productivity and productivity growth.

North Brabant is the leading technological region of the Netherlands, and is also innovative in the European Union (EU) context, as illustrated by its prominent position in the EU Regional Innovation Scoreboard (Hollanders, Tarantola, and Loschky 2009). Within the region of North Brabant, the city-region of Eindhoven plays a particularly important role, as highlighted by recent comparative European studies on knowledge-based regions, typifying it as “star niche player” and ranking it eighth among Europe's smartest medium-sized cities (Fernandez-Maldonado and Romein 2010).

The leading innovative performance of North Brabant (and Eindhoven City-Region) can be illustrated by a variety of indicators, including hightech employment, patent applications, research and development (R&D) expenditure, as well as the number of leading firms and universities. Thus, North Brabant is the Dutch region with the highest share of hightech employment. It made up 5.3 per cent of the labour force in South Netherlands in 2006, more than twice the share of the more affluent West Netherlands, where it comprised 2.2 per cent of the labour force.

The number of patent applications coming from North Brabant is impressive. It has one of the highest scores with respect to patent applications per capita amongst OECD regions and by far the highest in the Netherlands (Figure 12.1). In several sectors, North Brabant is the leading region with respect to patents.

For many senior managers in multinational corporations, visits to Malaysia, the Philippines, or China do not involve lengthy stays in Kuala Lumpur, Manila, or Beijing. Rather, they involve site visits to facilities in rather more distant regions, such as Johor, Cebu, or Chengdu — states or provinces that are far-removed from the national seat of power.

These sub-national regions have created environments that seem different — and slightly separate — from the rest of the country. This might be due to a particularly vibrant business community, a strongly-rooted outward orientation, a tradition of effective public administration, or an unusually deep pool of skilled workers. In these areas, investors do not liaise with the central government, but rather provincial or state government agencies for permits, licences or tax incentives. And, they source components, equipment, or design work from a variety of dynamic firms nearby. Finished goods and services are sold to neighbouring firms, or dispatched from the local air- or sea-port to international markets.

In the most successful up-and-coming regions, firm clusters attain technological capabilities far ahead of those in more established centres of industry. And, some of these states and provinces have managed to spawn activities in new sectors, even within national-level policy environments that are not conducive to innovation and higher value-added activities.

Over the past decades, Asia's geography of production has undergone a number of important changes. Technological change, growing numbers of multinational corporations, and the liberalization of trade and investment regimes are allowing production processes to be broken down and relocated to diverse locations in the pursuit of specific capabilities and cost differentials (Dicken 2003).

These changes signal heightened competition, but also increased opportunities for economies formerly on the periphery. More finely-dissected production processes, and a more hospitable policy environment have led to the development of regional production networks, which have enabled the proliferation of manufacturing activities across Asia. This “flying geese” phenomenon has seen lead countries climb the value chain, delegating less technologically-sophisticated activities to other countries in the region (Hamaguchi 2009).

On one level, this has made incursions into manufacturing easier, as countries or regions can begin producing specific components as opposed to entire finished goods (Joseph, this volume).

Introduction

The previous chapters have contained numerous examples of dynamism, entrepreneurship, and policy innovation from state and provincial governments in Asia and beyond. Referring to the central question of whether sub-national governments can be “architects of growth” — to the extent that they design and implement policies to address needs regarding their industrial sectors — the answer is “yes”.

However, given their subordinate position vis-á-vis their national counterparts, sub-national governments never assume this role under circumstances of their own choosing. Furthermore, even if there is political will to prioritize industrialization, their restricted range of responsibilities and limited financial wherewithal — as well as the nature of their entry into the electronics sector — may preclude effective outcomes.

Consequently, the questions that then arise are: when do sub-national governments take on the role of “architects”; to what extent can they become the prime drivers of industrialization; and which of the strategies and policy measures that are available to them are productive and under what conditions?

In order to shed light on these questions, this chapter will draw out common themes and conclusions from the ten cases. This will be done in five parts.

The first section will analyse the “birth” of the electronics sector in the various cases. New industries emerge in a given location for a range of reasons, of which government initiative is but one. Subsequently, once an industry is mature, traded and untraded externalities favour established centres, making it harder to establish agency on the part of the sub-national government concerned. Thus, the moment when an industry first emerges in a given location offers a unique opportunity to evaluate whether the respective state or provincial government was aware of its existence and/or involved in its emergence.

The subsequent two sections will explore how the respective subnational governments supported the development of their electronics sectors following their emergence and consolidation. This will be done along two axes — vertical and horizontal.

As regards vertical dynamics, this includes: how the various subnational governments were affected by the governance structure within which they had to operate; the extent to which centrally-pursued regional policy worked in their favour; and the manner in which state and provincial leaders managed relations with the centre to secure resources and pursue their own aims.

Introduction

ASEAN has made a remarkable achievement in liberalizing trade in goods through the ASEAN Free Trade Agreement (AFTA) where tariffs on virtually all imports within ASEAN have been reduced to zero, bar a few sensitive items since 2010 for the six earlier members. The progress made in liberalizing trade in services, however, has not been as impressive. Liberalization efforts in services in the past have been focused on two areas: the promotion of trade services by using the GATS approach of request and offer of liberalization by service sector and the promotion of flows of skilled labor through the establishment of Mutual Recognition Arrangements (MRAs) of professional services. After several rounds of negotiations and eight commitment packages since the ASEAN Framework Agreement on Trade in Services (AFAS) was established in 1995, the region has failed to liberalize services trade between member countries. Commitments made thus far are marginal to those already made in the WTO. As for MRAs, although several have been signed since 2005, their actual impact on promoting greater flows of professional services within the region is at best negligible.

At the 9th Summit in October 2003, ASEAN announced its intention to create an ASEAN Community based upon three pillars: the ASEAN Security Community, the ASEAN Economic Community and the ASEAN Socio-Cultural Community. The ASEAN Economic Community (AEC) envisions regional economic integration by 2015. In 2007, the 13th ASEAN Summit adopted the ASEAN Economic Community Blueprint (AEC Blueprint), a coherent master plan guiding the establishment of the ASEAN Economic Community 2015. The AEC Blueprint would establish ASEAN not only as a single market, but also as a single production base which requires the free flow of the factors of production, including capital and skilled labor.

This chapter seeks to assess the progress ASEAN has made thus far in liberalizing services trade within the region according to the milestones and targets stipulated in the AEC Blueprint. The first section provides an overview of the relative importance of the service sector to ASEAN economies. The second section describes the service trade negotiation modality and liberalization commitments made thus far under the AFAS as well as those prescribed in the AEC Blueprint. Section three examines the extent to which ASEAN member countries have met the liberalization milestones prescribed in the AEC Blueprint.

Over the past thirty years, China has witnessed an explosive growth of its cities. By 2008, the urban population of China had risen to 607 million (45.7 per cent of the population). Two-thirds of the urban population growth is attributable to rural-to-urban migration. By 2015, the urban population is projected to be 700 million, exceeding the rural population for the first time. By 2030, one billion people will live in China's cities. This growth is being accompanied by a rapid expansion of urban land: between 1990 and 2005, China's urban land area grew by an average of 24,727 square kilometres per year, reaching a total of 2,600,000 square kilometres. In this essay, we examine the history of urbanization in China and explore the effects of the related spatial, physical, and social changes on the environments of the poor. In order to create sustainable urban environments in the coming years, it will be necessary to address the challenges these changes bring with them.

URBANIZATION IN CHINA

Rapid urbanization has contributed to China's economic growth and improved living conditions. From 1981 to 2001, 400 million people escaped poverty and 200 million of those who continue to live below one dollar per day have been provided with assistance. These successes have created new challenges for local authorities in urban areas. They have had to concern themselves with providing housing, improving access to services, and addressing growing inequality. “China has recorded the most spectacular progress in the world, with improvements to the day-to-day conditions of 65.3 million urban residents who were living with one or more factors of shelter deprivation.”

In 1949, China was a predominantly rural society. Only 11 per cent of the population lived in its 69 cities. 5 China's urbanization has passed through three distinct phases: moderate growth, a plateau from the late 1950s to the early 1980s, and accelerating urbanization in recent years. In the 1950s, a natural growth of urbanization took place without restrictions as people moved freely from the countryside to the cities.

The Mekong River runs through or along Myanmar, Laos, Thailand, Cambodia, and Vietnam. In these “Mekong countries”, agriculture provides a livelihood for a larger proportion of the population than the proportion of GDP derived from agriculture. Agriculture also functions as a safety net for the cities: many workers return to the country to work on farms when there is a rise in unemployment. But the degradation of the environment (soil fertility, erosion, increased population density) and climate change threaten the agriculture sector's ability to play these two roles. Plans must be implemented to keep the agriculture sector sustainable and competitive. Such plans must be adapted to the fact that farmers are financially fragile. Most of their revenue is absorbed by day-to-day expenses, and their investment capacity is low. Also, population growth has saturated the available cultivable lands. As the capacity of urban areas to accommodate rural migration has in most cases reached its limit, crop cultivation is being extended to less fertile areas, often with slopes where erosion happens. Such areas are typically in the peripheral region of Cambodia, the hilly areas of Sayaboury in Laos, and the highlands of Vietnam. As more and more marginal land is being cropped, the sustainability of this activity decreases and the rate of rural poverty increases. Within the Mekong countries rural poverty usually is higher than the national average, and it is higher than rural poverty elsewhere in Asia.

The Mekong countries agriculture is based on irrigated rice, but this system has reached its limits. For rain-fed agriculture, even on sloppy areas, direct sowing (or seeding) mulch-based cropping (DMC), also known as “no tillage” systems, is a better choice. This method was originally developed for tropical upland agriculture in central-west regions of Brazil. For some years, the Agence Française de Développement (AFD) funded research and development projects based on DMC. These projects were implemented with the technical and scientific support of the Centre de Coopération Internationale en Recherche Agronomique pour le Développement (CIRAD) in Cambodia, Laos, and Vietnam.

The Southeast and East Asia regions have made major progress in reducing income poverty by bringing down the level of poverty incidence from 57 per cent in 1990 to 16 per cent in 2008 for the US$1.25 international poverty line and from 81 per cent to 28 per cent for the US$2 international poverty line, over the same period. However, living standards for many poor people remain a major challenge due to worsening environmental degradation and increasing vulnerability to climate change. Southeast and East Asia's remarkable economic growth over the last twenty years was often accompanied by environmental stress such as deforestation and overfishing, transformation of green areas into commercial and industrial land, and massive pollution and congestion in mega-cities.

Although the environmental problems of the Southeast and East Asia regions are reasonably well documented, less is known on how environmental policies, climate change mitigation and adaptation measures can be used to further reduce poverty and improve the situation of the poor who frequently live in the most environmentally fragile areas. This book argues that trade-offs between poverty reduction, improvement in quality of environment, and mitigation as well as adaptation to climate change, can be avoided. Policy makers can design policies which manage these three issues together to produce a triple-win outcome: raising the welfare of the population by simultaneously reducing poverty, improving the environmental quality, and mitigating and adapting to climate change.

This book presents empirical observations of this triple-win option in Southeast Asia, East Asia, and the Pacific. It describes livelihood and income generation opportunities for the poor, as well as environmental policies that directly influence the living standard of low- income people. This book, utilizing a multidisciplinary approach, argues that more triple­win outcomes would be possible for the poor, the environment, and the climate, if awareness of the environment in which the poor live were greater and consequently appropriate policies were implemented.