Representatives of Australia, Brunei Darussalam, Canada, the People's Republic of China, Hong Kong, Indonesia, Japan, the Republic of Korea, Malaysia, New Zealand, the Philippines, Singapore, Chinese Taipei, Thailand, and the United States of America, meeting in Bangkok on 10–11 September 1992 at Ministerial level,

Reaffirming the basic principles adopted by Ministers in Canberra on 67 November 1989, in Singapore on 30–131 July 1990 and in Seoul on 12–14 November 1991;

Determined to pursue the objectives of APEC as stated in the Seoul APEC Declaration to

(a) sustain the growth and development of the region for the common good of its peoples and, in this way, to contribute to the growth and development of the world economy;

(b) enhance the positive gains, both for the region and the world economy, resulting from increasing economic interdependence, including by encouraging the flow of goods, services, capital and technology;

(c) develop and strengthen the open multilateral trading system;

(d) reduce barriers to trade in goods and services and investment among participants in a manner consistent with GATT principles, where applicable and without detriment to other economies; and

Recognizing that the rapidly growing activities of APEC since its inception have increased the need for a support mechanism to facilitate and co-ordinate APEC activities in order to strengthen APEC's role and enhance its efficiency in promoting regional economic co-operation, hence the need to establish an APEC Secretariat and an APEC Fund;

Do hereby declare as follows:

SECRETARIAT

1. Establishment of the APEC Secretariat

(a) An APEC Secretariat is established as a support mechanism to facilitate and co-ordinate APEC activities, provide logistical and technical services as well as administer APEC financial affairs under the direction of the APEC Senior Officials' Meeting (APEC SOM).

(b) The APEC Secretariat will be empowered to act on behalf of APEC members under the direction of Ministers as communicated through the APEC SOM.

Introduction

Fane (this volume) draws attention to the ambivalence of official policy towards integration of Indonesian finance with the world markets. A further indication of this ambivalence is the government's concern about the size of Indonesia's foreign debt, which grew from only 28 per cent of GDP in 1982 to 69 per cent in 1987, and by 1994 was of the order of 65 per cent. As a result of this dramatic but quite unexpected expansion, there are now frequent references in the media to the need for Indonesia to do this or not do that, because of its supposed ‘foreign debt problem’.

This is reflected in various actual or proposed policy responses. A high level ministerial committee was established in 1991 (Government of Indonesia 1991) to control the level of foreign borrowing by state enterprises (including the state banks), as well as that for private projects closely linked to state enterprises and the public sector in general. The Coordinating Minister for Finance and Development has proclaimed the desirability of keeping Indonesia's total foreign debt (now over $90 billion) to below $100 billion. The sale of government shares in various large enterprises to foreigners has been mooted as a way of repaying part of its foreign borrowings. Exchange rate policy is being managed in such a way as to attempt to stimulate non-oil export growth, in order to assist with debt repayment. The recent relaxation of controls on direct foreign investment (Pangestu, this volume) provides greater encouragement for capital inflow to take the form of equity rather than debt (although the government has baulked at loosening the restriction on the level of foreign investment in Indonesian companies listed on the stock exchanges).

There has been little debate on the appropriateness of these policies, and so it is of interest to consider them in the light of the assertions by Little et al.

When discussing in international economic environment, the political and strategic environment cannot be ignored, however — if only because it intrudes directly into the forces shaping the international trading rules.

The end of the Cold War is reshaping the international environment of the East Asian market economies, as decisively as the Cold War itself shaped international economic relations in the 1950s and 1960s. The end of the Cold War has brought new opportunities: through the spur it has given to internationally-oriented growth in India and Indochina; and the opportunity it has provided for gradual economic change in North Korea in ways that will eventually facilitate internationally-oriented integration of the two Korean economies. It has also brought opportunities to China, as the greater security on its long land borders allows more confident and complete application of national energies to the tasks of economic reform and development.

But there are also challenges, and threats, to the continuation of internationally-oriented growth in the new environment.

The collapse of the Soviet Union, and the difficulties that its successor states and the states of Eastern Europe are having in establishing institutional bases for market-oriented development, are placing great strain on the whole European economy. In Germany this is compounded by the special problems of reunification. This has deepened and attenuated recession, and turned community opinion defensively inward on all matters related to the international trading system. The problems of Western European adjustment to marketoriented development in the East are formidable, and as yet only faintly appreciated. There will be exacerbation of intercontinental discrimination in European trade, in result if not intent. But even the intent will be increasingly unreliable, as jarring comparisons of East Asian and European economic performance, and a persistent competitive challenge in global including European markets, breeds resentment, at its worst paranoia, and more defensive and inward-looking approaches to trade policy.

The essential requirements of economic co-operation in the Asia-Pacific region are: openness in international economic policy and diplomatic approach; evolution in the practice of high-level consultation and cooperation; and non-discrimination in growing economic partnership among disparate polities (Yamazawa 1992).

The Pacific Economic Co-operation Council (PECC), established in 1980, was the first building block in the architecture of regional economic policy consultation. PECC — with its informal, tripartite structure, which includes participation at the official, industry and academic level — carried forward the process of fostering consultation and discussion of interests in regional co-operation through its trade policy forum and other task forces.

An important policy achievement which grew out of consultations within PECC was the development of Asia-Pacific support for the Uruguay Round of multilateral trade negotiations, and the facilitation of broader economic dialogue involving both China and Taiwan. PECC's semi-official processes also laid the groundwork for the next step in the development of outward-looking economic co-operation — the evolution of the Asia-Pacific Economic Co-operation (APEC) group. APEC, through the establishment of regular ministerial-level meetings, brought the process of economic co-operation into the political arena.

APEC was established at ministerial level in 1989, and has rapidly established itself as the main regional forum for discussion of trade liberalization and expansion.

APEC has fostered consistency between regional economic policy objectives and multilateral international economic policy goals — and sought to strengthen the GATT-based multilateral trading system.

APEC could pursue these objectives most effectively if it were able to set positive examples of successful trade liberalization and expansion. It is imperative that any joint economic or trade policy decisions by APEC be consistent with the fundamental principle of universal most-favoured nation treatment of all trading partners as set out in Article I of GATT. This contrasts with joint decisions that explicitly discriminate against non-participants, and seek to rationalize discrimination by reference to Article XXIV. Any attempt to negotiate an APEC-wide preferential trading agreement would be economically undesirable, given the trade and investment links of the East Asian and ASEAN economies outside the region, especially with the EC: it would also be destined to end in failure.

Introduction

Thai clothing and textile industries have become increasingly export-oriented during the 1970s and 1980s. Exports as a percentage of the total value of production in these industries have increased markedly: from 4 per cent in 1972 to 46 per cent in 1987 for clothing; from 8 per cent in 1972 to 22 per cent in 1986 for fabrics; and from 0.5 per cent in 1972 to 22 per cent in 1986 for yarn. However, although the importance of domestic consumption has declined, it still accounts for most of clothing and textile production.

The share of domestic consumption of clothing and textiles in total production declined from 80 per cent in 1972 to 65 per cent in 1986. The domestic market has two components: “border trade” and actual domestic consumption. Border trade consists of exports to neighbouring countries such as Burma, Kampuchea, Laos and Malaysia. Official data are not available, but it is estimated that around 20 per cent of domestic consumption, or 13 per cent of total production, is in the form of border trade (IFCT 1986; Theravaninthorn 1982). Domestic consumption and border trade use the same distribution channels, that is through the central market in Bangkok.

Export values for clothing and textiles have increased consistently. Thailand was a net importer of clothing and textiles until 1972 but since then has become a net exporter. Clothing has been the major export item, accounting for 76 per cent of the total for clothing and textiles in 1987, followed by fabrics (19 per cent), yarn (4 per cent) and fibre (1 per cent). Despite some fluctuations, the export value of clothing and textiles has grown by around 30 per cent per year since the 1980s, from $0.5 billion in 1982 to $1.9 billion in 1987. Clothing and textiles have been the country's major foreign exchange earners since 1985, displacing the traditionally dominant export item, rice (Table 6.1).

Exports destined for MFA-markets accounted for 56 per cent of the total in 1987 (Figure 6.1). The EC and the United States are the major markets for Thai clothing and textiles, each accounting for around 23 per cent of export value.

Historical Background

Although Thailand has a long history of textile production, the modern clothing and textile industry was established relatively late compared with other East and Southeast Asian countries (Koomsup 1973). Low import tariffs following the imposition of the Browring treaty in 1830 forced Thailand to open its market to the colonial powers and therefore inhibited the early development of the industry.

The first textile machines, including 3,232 spindles and 72 looms, were imported from Germany by the Ministry of Defence in 1936 for military purposes (Koomsup 1973). It was not until 1946 that modern, privately owned textile mills began to operate with a capacity of 3,600 spindles. The first privately owned modern textile mills were, in fact, established by a local entrepreneur in response to the shortages of the Second World War.

After 1946 the industry, particularly mechanized spinning, expanded rapidly, with the number of spindles rising to 43,000 in 1952. However, production collapsed in the late 1950s due to competition from low cost imported cotton textiles from Pakistan. The price of imported cotton yarn was 25–30 per cent below that of domestically produced yarn. Santikarn (1977) suggests that Pakistan export subsidies were one reason for these low import prices. Several Thai spinning mills went bankrupt and had to be closed down. The Thai Government reacted by giving protection to the industry for the first time, imposing the Import Restriction Act on cotton yarn imports in 1955. The Act was amended to include cotton fabrics in 1957.

Import tariffs and the introduction of the Investment Promotion Act in I960 encouraged investment. The textile mills that had closed during the 1950s, including the textile mills owned by the military, were taken over and expanded by local entrepreneurs as well as by Chinese entrepreneurs from Shanghai and Hong Kong. Three pioneer firms were established, mainly in cotton textiles: the Thai Blanket Industry (1959); Thai Durable Textiles (1961); and Luckytex (1961).

Introduction

Life insurance and pension funds represent the major vehicles for long-term savings in most developed economies. Life insurance originally grew out of the need for individuals to provide their dependants with a level of financial security in case of their premature death. However, with declining mortality rates and the advent of retirement from the paid labour force, life insurance policies largely have become long-term savings contracts. In essence, these policies now provide benefits which focus on retirement rather than death.

Employer-based pension funds appeared in the nineteenth century in the UK and the US to provide employers with a mechanism for retiring older staff as they became less productive. As the pension industry developed world-wide, it was natural for life insurance companies—with their closely related skills and experience in long-term individual life insurance policies—to offer a range of pension products. Indeed, for many life insurance companies, group pension business has now become much more important than the original life business.

From the macroeconomic point of view, life insurance and pension funds are of great interest because of their ability to generate long- term savings, which then become available for financing similarly long-term investment projects. Financial policy-makers are well aware of the potential contribution to economic growth of this sector, but they are also conscious of the risk to life insurance policy holders and pension fund members that their savings will be dissipated rather than built up over the years by those to whom they are entrusted, whether as the result of deliberate intention or poor management. The objective, therefore, is to create a policy regime and a regulatory environment which will encourage these forms of saving, while at the same time provide a high level of protection for individuals’ savings.

With these purposes in mind, the Indonesian government introduced new life insurance and pensions legislation in 1992 (Government of Indonesia 1992a, 1992d).

Introduction

External shocks, coupled with stagnant investment and economic growth in the early 1980s, forced Indonesia to pursue drastic adjustment policies. Between 1983 and 1985, the focus was on short-run stabilisation—in particular, on restoring external creditworthiness by cutting domestic absorption. But soon it became apparent that short-term stabilisation measures alone would be insufficient to restore long-term growth. The stabilisation policy was thus complemented by broad-based policy reforms aimed at increasing domestic savings mobilisation and the efficiency of resource use. These reforms changed the emphasis of Indonesia's development strategy from heavy reliance on the public sector, import-substitution industrial policy, and financial repression, to export-oriented industrial policies and market-based financial policies, combined with far greater emphasis on the private sector.

This paper focuses on policy reforms in the banking industry since 1983. It begins by reviewing the macroeconomic background, the financial sector, and aspects of competition in the economy. It then provides an overview of policy reforms over the last decade in the banking industry before looking at the more important reforms in detail, giving particular attention to difficulties in implementing the new prudential regulations. The impacts of the reforms are then analysed and, finally, a summary of what has been done and what remains to be achieved is presented.

Macroeconomic background

During the period since 1966, economic development in Indonesia has been hailed for its three success stories: first, the rapid suppression of hyperinflation and transition from a controlled to a market-based economic system during the second half of the 1960s; second, successful exchange rate management to avoid the ‘Dutch disease’ problem during the 1973 to 1982 oil-boom period; and third, the rapid transition from heavy dependence on oil in the late 1980s.

Over the past twenty years Indonesia, together with its ASEAN partners and the Asian newly industrialising economies, has been regarded as one of the most dynamic countries in the international economy (World Bank 1993a:!).

Most studies on the effects of the MFA on developing countries have focused on evaluating the rents gained by developing countries. Hamilton (1986a) measured the rents gained by Hong Kong using information on the value of that country's bidding quota. He found that in 1983 the quota rents gained by Hong Kong exports to the United States, the EC and the European Free Trade Association (EFTA) countries were $506.8 million. Hamilton also estimated that the rents gained for ASEAN countries in 1981 and 1982 (at 1982 prices) were $28.14, $21.14, and $19.95 million for Thailand, Indonesia and Malaysia respectively (Hamilton 1986a).

Another effect of the MFA that needs to be evaluated is the loss to developing countries of not being able to export in a free trade situation. This should be added to the efficiency loss and the dead weight loss in any measurement of the net welfare effects of the MFA.

A recent model for the clothing and textile trade, developed by Trela and Whalley (1988), concluded that developing countries are the losers. They suggested that if the MFA were abolished the MFA exporting countries would gain approximately $11 billion. Trela and Whalley's study assumed differentiated product groups.

To focus on the welfare effects of the MFA on developing countries, the “world” has been divided into three regions: MFA-importing countries (MFA-M), MFA-exporting countries (MFA-X) and the rest of the world (ROW). Some important assumptions are as follows:

1. there is only one aggregated product, clothing (SITC 84), that is, the product is homogeneous;

2. all excess demand and supply are log-linear.

Figure 5.1 is based on these three country groups. ES is an excess supply function of the MFA-X to both MFA-M and ROW. ED* and ED' are excess demand functions of MFA-M and ROW respectively, where EDED is the total excess demand function of the two regions. In a free trade situation, the equilibrium point where total excess demand equals excess supply is A, the world market price is Pf and the imports of MFA-M and ROW are PfA.

Travel throughout the Asia–Pacific was an important part of the job of the Executive Director of APEC. During the year, I spoke at the Pacific Basin Economic Council (PBEC) annual meeting in Seoul, the Pacific Economic Co-operation Council (PECC) meeting in Hawaii, the Asia–Pacific Council of American Chambers of Commerce (APCAC) in Chinese Taipei, as well as various Chambers of Commerce (such as in Jakarta, Kuala Lumpur, Singapore, and Hong Kong). I also attended and spoke at academic and think-tank conferences (Awashima Conference, Japan; Centre for Strategic and International Studies, Jakarta; Institute of Southeast Asian Studies, Singapore; East-West Center, Hawaii; and so forth). The purpose was to tell the APEC story far and wide throughout the region.

There was a great deal of interest in APEC, but it was not always matched by in-depth knowledge, which was quite understandable given the fact that APEC was less than five years old. APEC was always better known in Asia than in America. The Asian media were much more interested than the American or European media. This changed somewhat during the Seattle Leaders' Meeting when there was considerable U.S. and European interest (over 2,000 media representatives from the United States, Asia and Europe were in Seattle). This was an exception, however, and after the Seattle meeting, the U.S. media reverted to its European focus.

In addition to meeting with hundreds of APEC and non-APEC officials and journalists in Singapore, I made a special effort to reach the business/private sector. While business people by and large knew less about APEC than the journalists or officials, they were ready to listen and eager to learn more about APEC, especially if the focus was on what APEC could mean to the bottom-line.

While in Japan, we visited Osaka, Japan's gateway to Southeast Asia. There, interest in APEC was very high among officials and business people. Osaka is scheduled to host the first Asia–Pacific International Trade Fair in October 1994 and reportedly will be the venue of the APEC Leaders' Meeting in 1995. The Ministerial Meeting will be in Tokyo.

In the last two months of 1993, the regional and international context of Asia-Pacific economic growth has come together in a favourable way, as a result of three major events: the passage of the NAFTA arrangements through the United States Congress; the successful meeting of APEC Heads of Government in Seattle; and the successful completion of the Uruguay Round.

While NAFTA in itself has undesirable features, by 1993 its passage through the Congress had become an essential condition for the United States administration holding the line on inward-looking tendencies in the national polity. Victory in the Congress gave outward-looking elements of the Clinton Administration confidence and momentum that was important to success in the APEC leaders meeting and the final stages of the Uruguay Round negotiations.

The undesirable features of NAFTA include its embodiment of trade discrimination under Article XXIV of GATT, and additional distortions associated with unwieldy rules of origin.

For East Asia, NAFTA always presented substantial problems. Trade and investment diversion raised concerns in East Asian countries. But to East Asia, the direct damage was less important than the larger threat NAFTA posed to the international trading system. Within Southeast Asia, the United States discussion of NAFTA was a trigger for Malaysian Prime Minister Mahathir's idea of an East Asian Economic Caucus (EAEC), and for commitment to the ASEAN Free Trade Area (AFTA).

As 1993 drew towards a close, however, the reservations in East Asia and the Western Pacific about the dangers of NAFTA were overwhelmed as the Clinton Administration faced the test of getting NAFTA through Congress, and East Asia considered the impact of his possible failure upon the constituency for open trade in North Aemrica. Western Pacific reservations about NAFTA were used as it became clear that its main proponents within the administration saw NAFTA in a wider context that included commitments to trade facilitation among APEC countries and to the successful conclusion of the Uruguay Round.

The Indonesian economy continued to perform very well in 1994. Growth of output was brisk, and inflation was reasonably well under control. The balance of payments has been generally strong; fears of a sustained fall in oil prices proved unfounded, although the disappointing growth performance of non-oil exports in 1993 (especially in textiles and garments) seems not yet to have been corrected. Management of the money supply has been reasonably successful (although money growth will probably need to be cut back if inflation is to be lowered), but it has been made difficult by large and fluctuating levels of capital flows to and from overseas—which call into question the appropriateness of current exchange rate policy.

Introduction of a new five-year development plan and the second long-term (25 year) development plan have been highlights of economic policy-making in 1994, together with the introduction of new policy packages concerning foreign investment, trade, and small business finance. Of these, the foreign investment package seems by far the most significant. The trade package was regarded by many as a disappointment—especially by industries which are reliant on importable inputs—demonstrating the continuing difficulty faced by the government in promoting strong competition in several key areas in the real sector.

Economic growth

Growth slowed a little to 6.9 per cent in 1991 and 6.4 per cent in 1992, after booming in 1989 and 1990 at 7.5 per cent and 7.2 per cent, respectively. The estimated 6.5 per cent increase in real GDP in 1993 confirms that fears of a serious economic downturn as a result of the tight monetary policy in 1991 and early 1992 were overstated. Business confidence, especially on the part of domestic investors, recovered in the last quarter of 1993, and growth in 1994 is estimated to have been similar to that in 1993; more rapid expansion is not expected until 1995.

The manufacturing sector should continue to lead, growing at close to 10 per cent p.a. in response to strong domestic demand. Growth in agriculture should be close to the normal level of around 3 per cent.

Thirty-one years of experience as a diplomat has made me very skeptical about predicting the future. How many German experts (including myself) predicted German reunification in our lifetime? And it was only a few years ago that conventional wisdom was that 1992 would be the year of Europe — that is, the European Community would unite to become the most powerful and dynamic economy in the world. The problem is that unforeseen difficulties (for example, the astronomical costs of German reunification) create unpredicted consequences that change the pattern of events (such as the drain on German resources plunging Europe into recession).

Most indicators suggest that the twenty-first century will be “The Pacific Century”. One does not have to be of the doom and gloom school of Michael Dobbs-Higginson, who predicts a trade war between Europe, NAFTA and Asia, to accept the possibility that things could go wrong. A trade war between the United States and Japan, war on the Korean peninsula, and mass migration should China become unstable, are just a few of the possible disruptions that could check the economic growth and prosperity in Asia. The question is how likely these things (or equally disruptive events) will happen. It is impossible for any person or group to predict.

However, assuming that we muddle through and maintain relative stability in the Asia–Pacific region, the prognosis looks good. If, as it appears now, a consensus may be developing among the APEC Leaders, who will meet in Indonesia, to accept the goal of achieving free trade in the region by 2020, then the prognosis is indeed bright. However, even if the Asia–Pacific economies do not reach the goal of free trade by 2020, but continue chipping away at barriers to trade and investment, they will continue to fuel economic growth and prosperity. It will be necessary, at the same time, to accelerate APEC programmes with a developmental thrust, such as human resource development and technology transfer, so that the less developed economies in APEC can catch up.