: Super User; Region; 23 June 2010; Hits: 1110

S-E Asian govts must tackle reform

SOUTH-EAST Asian governments have recently been congratulating themselves. On the surface, it seems they have good reason. All have experienced sharp rebounds in economic growth in recent months.

And current projections suggest that the positive growth is likely to continue – albeit at a slower pace – for the rest of the year.

Malaysia’s economy leapt 10.1 per cent year-on-year in the first quarter, its highest jump in a decade, and appears on track for 6 per cent growth this year. Most economists see Indonesia’s economy growing by around 5.8 per cent this year, after chalking up first quarter growth of 5.7 per cent.

Countries that investors have come to view more negatively have also done well. The Philippine economy grew by a surprising 7.3 per cent in the first quarter, with full year projections now ranging between 4.4 and 5.9 per cent.

Crisis-ridden Thailand is doing even better. After contracting by 7.1 per cent last year, the Thai economy posted its strongest growth in 15 years in the first quarter of this year, chalking up an annualised growth of 12 per cent. Thai Prime Minister Abhisit Vejjajiva said last week that he expects economic expansion for the year to reach 6 per cent.

But as exports rebound and consumer sentiment improves, the enthusiasm for economic reform is beginning to wane. This could limit the ability of these states to take advantage of the new opportunities that accompany the global economic recovery.

Presenting the 10th Malaysia Plan in Parliament last week, for example, Prime Minister Najib Razak carefully avoided explaining exactly how he intended to cut the food and fuel subsidies that are largely responsible for Malaysia’s burgeoning fiscal deficit. Nor did he deliver on a earlier promise to wind down affirmative action policies in favour of the nation’s Malay community.

Indonesia’s reform effort is in better shape. But the resignation of reform- minded finance minister Sri Mulyani Indrawati early last month has raised questions. Her successor, Mr Agus Martowardojo, a banker with a reputation for taking on some of the nation’s most powerful tycoons, looks like a good choice.

But the battle is far from over. Other less high profile reformers who have been eased out of their positions in recent months after they tackled vested interests include Mr Ari Soemarno (Pertamina) and Mr Darmin Nasution (tax office).

Mr Benigno Aquino III will be inaugurated as president of the Philippines on June 30, ending a prolonged period of policy paralysis under outgoing President Gloria Arroyo. But will the popular new leader fare any better? Mr Aquino lacks political experience and controls neither house of Congress. It will therefore be some time before he is able to build a workable coalition. He says he plans to focus on tax evaders rather than raise new taxes to plug the fiscal deficit, but his broader economic plans remain vague.

Mr Abhisit has by far the most unenviable task. Propped up by the military, his government cannot deal with the country’s economic problems until it has resolved the current political impasse.

One of the more puzzling aspects of the current situation is the apparent reluctance of popular reform-minded leaders to back their hand-picked technocrats. Indonesian President Susilo Bambang Yudhoyono, for example, was slow to declare his support for Dr Sri Mulyani when she came under attack.

And earlier this month, Datuk Seri Najib pointedly avoided backing Mr Idris Jala, head of the Cabinet’s performance management and delivery unit, when the latter suggested that the government could be bankrupt by 2019 if it did not eliminate wasteful subsidies.

Unlike Mr Abhisit, Dr Yudhoyono, Mr Najib and Mr Aquino do not head weak governments struggling to ensure their political survival. The popularity of the Indonesian President has remained strong since his election last year. Mr Najib’s popularity is also rising. A recent survey by the Merdeka Centre gave him an approval rating of 73 per cent, up from around 40 per cent in March. Mr Aquino is also popular.

It is true that these leaders face powerful vested interests determined to stymie the reform process. But is opposition to reform really so overwhelming?

Expectations have admittedly been high. Even so, Japan is probably not the only country in Asia that could do with another leader like Mr Junichiro Koizumi right now. The latter was able to use his personal popularity to push through controversial economic reforms despite strong opposition within his own party.

South-east Asia’s policymakers need to grasp the nettle of reform.

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Key Political Risks

Asia is the fastest growing region in the world, and is likely to remain so in 2013. However, a number of risks cloud the picture.

The good news is that domestic demand in the region remains strong and should continue to cushion the impact of weaker external demand on overall economic growth. The completion of national elections in Japan and South Korea in December 2012 should also help reduce political uncertainties.

But Asian governments will need to guard against the adverse impact of prolonged easy financial conditions on inflation.

Rising inequality also continues to threaten social stability. Ethnic and religious rivalries remain just below the surface in many countries. When combined with government corruption and (in some countries) high youth unemployment, this could become a deadly mix. This seems particularly true of China.

Territorial disputes also require close monitoring. Much diplomatic activity in the new year is likely to be centered on finding ways to reduce tensions over resource-rich islands in the South China Sea, where Beijing's claims overlap with those of Japan, Vietnam and other Southeast Asian states. South Korea and Japan also have rival territorial claims.

North Korea remains the wild card. Inclined to believe its own propaganda, Pyongyang's new leadership could miscalculate, making belligerent moves that plunge the region into a military conflict that nobody wants.