If You Build It, Will They Come? How Institutions Matter in Economic Zones and Development in Southeast Asia

(This piece was written with the intention of simply recording my thoughts on the ABIS 2017. As somewhat more of a reaction paper than a real think piece, the analysis is rather light and not much effort was placed on showing supporting data. Fair warning.)

During the ASEAN Business and Investment Summit (ABIS) 2017 in Manila, the ASEAN Secretariat and the United Nations Conference on Trade and Development jointly launched the “ASEAN Investment Report 2017: Foreign Direct Investment and Economic Zones in ASEAN.” It once again shines the spotlight on the important role economic zones play in attracting investments, facilitating trade and generating employment among ASEAN member-states to spur industrial development. In general, economic zones are demarcated areas where industrial facilities, infrastructure and streamlined regulatory and administrative regimes are made available for the exclusive use of industries within the zone. This definition covers similar terms such as industrial parks, special economic zones, export-processing zones with minor differences in incentives offered according to their specific objectives.

In Southeast Asia, there are more than 1,600 registered economic zones since the first development in Singapore in the 1960s. However, economic zones track record in the region have been mixed. While there are well-known successful cases such as Singapore’s Jurong Island in constructing the foundation of its heavy industrialization push, many economic zones in the region have been disappointing to say the least. Infamous cases of failed developments include those that are practically empty like the Philippine’s Aurora Pacific Economic Zone and Freeport (APECO) and those like the Bataan Export Processing Zone (BEPZ, now Bataan Freeport Area) whose incurred costs (government subsidies, tax breaks, etc.) are larger than its benefits (employment generation, local input purchases, etc.). Given the variation in outcomes, what determines the success or failure of an economic zone?

Different Institutional Capacities, Different Arrangements: The Case of Singapore, South Korea and the Philippines

The first order difference between successful and failed economic zones in the region are mainly in terms of the capacity and the role the institutional authority governing economic zone development and operation play. Some models have the institutional authority serve as both regulator and developer/operator of economic zones such as Singapore’s Jurong Town Corporation (JTC), South Korea’s Korean Industrial Complex Corporation (KICOX) the Philippine’s Aurora Pacific Economic Zone and Freeport Authority (APECO) while others keep the institutional authority in a regulatory role and leave development and operation to the private sector such as the Philippine Economic Zone Authority (PEZA).

Best practice institutional arrangements indicate that government regulators and developer/operators should be separated to reduce government risk, political interference and take advantage of private sector expertise. In the Philippines, PEZA who lacks technical expertise in management is limited to a regulatory function where it decides incentives and approves investments while the private sector develops and operates economic zones. Evidence indicates this model has worked relatively well as PEZA has attracted over 3,000 locators and generated over 1.2 million jobs. In contrast, APECO is both regulator and developer/operator of the freeport zone in Aurora. Because of poor location planning directed by political rather than economic logic, APECO has failed to attract locators and firms to set up shop in the area despite a government investment of PHP2.9 billion.

However, this preferred arrangement assumes that all government institutional authorities are incompetent like APECO. By ignoring variation in government capacities, it effectively foregoes advantages afforded to fused regulator and developer/operator roles that characterizes much of the East Asian experience. In Singapore, JTC, a statutory body under the Ministry of Trade and Industry (MTI), is both regulator and developer/operator of economic zones. It is composed of highly competent professionals in real estate development and management. Its status as a statutory body under the MTI allows for better coordination between economic zone development and national economic priorities. For example, in the 1970s, JTC developed Jurong Island according to Singapore’s economic priority of shifting towards higher value-added heavy industry of petrochemicals. In South Korea, government organisation KICOX re-programmed its national industrial complexes it solely owns using a hub-and-spokes model to achieve dynamics gains in industrial agglomeration, clustering and university-industry innovation linkages after completing its catch-up industrialization strategy.

Institutional authorities with strong capacities in terms of technical and development skills such as in planning and management are best to play both regulator and developer/operator roles of economic zones. This fusion of roles allowed for a more efficient management, configuration and re-configuration of a critical mass of economic zones and industries within them to drive their rapid industrialization and development according to evolving economic conditions and priorities of the last four decades.  

Success and Failure: Beyond Fiscal Incentives and Static Gains

The success of economic zones must not be judged on static benefits alone such as investment attraction and employment generation that are often limited inside these zones. Most critically, dynamic gains such as innovation facilitation, technological transfer, and skills upgrading are what economic zones can contribute to genuine wider domestic economic transformation.

Cases like APECO that are also abundant in countries like Vietnam are evidence that static gains, much less dynamic gains, do not automatically follow by simply building economic zones and pouring incentives. Public sector risks are further exacerbated in the absence of a strong periodic impact assessment that lead to opportunities for abuse at the expense of public finances that could have been used for other development programs. For example, the Philippine National Tax Research Office reported in 2013 that PEZA-registered firms received PHP108 billion worth of fiscal incentives while remitting only PHP523.5 million to the National Treasury. Proper planning, robust demand assessment, appropriate infrastructure and one-stop services provision, upgrading programs and capacities of local firms and workforce matter more than tax breaks and incentives for long-term sustainability and competitiveness of economic zones.

Further, by differentiating between static and dynamic gains, the impact of variation of institutional capacities and arrangements become more apparent. While PEZA has been relatively successful in securing static gains of investment attraction and employment generation, it has been less successful in achieving dynamic gains like forward and backward linkages with the domestic economy or driving economic restructuring. This compared to JTC and KICOX that have played critical roles in facilitating new industries and continuous domestic technological upgrading to create the advanced industrial economies of Singapore and South Korea today. Variation in these cases suggest there are significant limits to a private sector-led model of economic zones whose many diverse commercial logics may not necessarily coincide with national economic priorities.  Regulation, development and management by a single highly capable governance institution simply make it easier and more efficient to program and re-program a critical mass of economic zones according to evolving economic conditions and imperatives over time to drive economic restructuring and industrialization.    

	Fusion of Regulator and Developer/Operator Roles	Separation of Regulator and Developer/Operator Roles
Weak Institutional Capacity	Static Gains (PEZA)	Limited Gains (APECO)
Strong Institutional Capacity	Dynamic Gains (JTC, KICOX)

Conclusion

Policymakers in many Southeast Asian countries have a misguided belief that if you build economic zones with abundant incentives, investment and employment will automatically come. The case of APECO and many other similar cases of weak institutional capacity and fused regulator and developer/operator roles often succumb to irrational planning and decision-making incurring massive costs without desired benefits. At the same time, however, policymakers need to take best practice institutional arrangements with a grain of salt. In the context of strong institutional capacities, dynamic gains are better secured by institutional arrangements that fuse regulatory and developer/operator roles in a single institutional authority. While a private sector led economic zone program may be desirable in contexts of weak institutional capacity, Southeast Asian countries ought to aspire more towards the development of high capacity and quality governance institutions to unlock the dynamic potential of economic zones for development.

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The Point of ASEAN

(This article originally appeared in the Diplomat back in 2016. https://thediplomat.com/2016/07/the-point-of-asean/)

Many observers of international politics often dismiss the Association of Southeast Asian Nations (ASEAN) as increasingly unable to manage regional crises. With the grouping marred by inaction and even a failure to simply issue joint statements over issues, such sentiments on ASEAN are now increasingly commonplace. Just a month after the debacle of its retracted Kunming joint statement on the South China Sea (SCS) disputes, ASEAN barely forwarded a watered-down joint statement on the SCS disputes, to the disappointment of many. The 49th ASEAN Foreign Ministers Meeting in Vientiane concluded with a statement that dropped any reference to the Permanent Court of Arbitration’s unfavorable ruling against China. Unsurprisingly, this is not the first time ASEAN has failed to act on or say anything meaningful about prevalent regional issues. In 2006 and 2014, ASEAN maintained a deafening silence as the Thai military staged a coup d’ etat and seized government power.

Given this, as one journalist astutely asked, what is the point of ASEAN?

It is a question I often ask myself as I get more and more invested in the regional intergovernmental organization. To understand ASEAN today requires a working knowledge of its historical purpose. ASEAN was primarily organized in 1967 to manage and contain the increasing external and internal conflicts and threats to the region after World War II and during the Cold War. In the context of a bipolar Cold War world order, ASEAN sought to be a “zone of peace, freedom, and neutrality (ZOPFAN)” to hedge against the United States and the former Soviet Union. Intra-regionally, Southeast Asia was fragmented by intra- and inter-state conflict. As a response, the five founding member-states—Indonesia, Malaysia, Singapore, Thailand, and the Philippines—agreed on a “treaty of amity and cooperation” for the “peaceful settlement of regional disputes” under the principles of non-interference and decision making through consensus, also known as the  “ASEAN Way.” A stable regional atmosphere made it possible for member-states to focus on quelling their respective internal conflicts and put all their resources and efforts into the goal of nation-building and economic development, emphasizing national resilience as the road to regional stability.

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Today, it is the same consensus-based decision making and non-interference course of action that once ensured regional security and development that cripples any meaningful action and compromises regional stability. No wonder even its own member-states often place ASEAN on the sidelines as a last-resort option to pursue foreign policy initiatives (see, for example, the Philippines favoring a legal strategy on the SCS dispute over ASEAN mechanisms).

Having studied other forms of regionalism elsewhere, however, I believe that regional intergovernmental organizations matter. They play important roles in both regional and domestic affairs.

In Africa, for example, the African Union automatically suspends any member-state that experiences unconstitutional changes in power from regional activities and gives it six months to restore constitutional rule. The chairperson and the secretary general are not only given the responsibility to condemn coup d’ etats, but also the power to impose a wide range of sanctions, as in Mauritania in 2008. In South America, the Organization of American States (OAS) often plays an active mediating role between the opposition and the government in the event of constitutional crises in its member-states, as in Venezuela in 2002. Such interfering actions and meddling statements are unthinkable for ASEAN, which in 2008 found it almost impossible to convince the military junta in Myanmar to open up to international relief operations in the wake of Cyclone Nargis given the regime’s fears about political change.

What makes the difference? A comparative analysis of regional IGOs shows that engagement from regional civil society and think tank networks, supported by an institutionally-strong secretariat and democratic governments, make regional IGOs more proactive and less fettered by the competing interests of individual member states. In Africa, it took the efforts of an active civil society, a network of indigenous lawyers, and an aggressive secretary general to form its progressive legal document on democracy and human rights. In South America, a watchful network of think tanks and civil society, supported by democratic middle power regimes, created among the earliest regional democratic charters. It is important to note that AU member-states are a mix of authoritarian and democratic regimes, yet the group is widely considered to be more progressive than the OAS, which is comprised of democratic member-states. Apparently, democratic member-state regimes are not necessary for a democratic regional IGO.

This is not to say that the relationship between these regional IGOs and civil society is all positive. In Africa, the exclusivity of AU engagement mechanisms shrinks the space for non-conforming civil society organizations. In South America, civil society engagement with the OAS is often limited to non-controversial issues. However, civil society in these regions wields influence because of the unique constellation of actors who created progressive democratic charters that provide for institutional mechanisms for engagement. Civil society participation is guaranteed and protected by specific charter provisions in both the AU and OAS.

ASEAN, on the contrary, represents a textbook negative case. It is characterized by a handicapped secretariat, a regional civil society network skeptical of its value for engagement, and unwilling democratic governments. The running joke in the region is that the ASEAN Secretariat performs more like a secretary than a general. Staffed only by over 300 personnel with limited funding, the secretariat can barely perform its secretary function, much less a more general-like one.

Further, civil society in Southeast Asia is too frustrated at the slow pace of ASEAN action, if there is any at all, to even think of engagement. Some also maintain a domestic strategy of engagement while others fail to raise their issues and advocacies into the higher regional agenda. Severe repression by ASEAN and its member-states, ranging from tactics of sabotaging people’s forums to choking international funding to outright intimidation, also do not help the progressive causes of civil society. Institutional mechanisms for civil society participation are still virtually non-existent. The region’s more democratic regimes in Indonesia and the Philippines are also reluctant to take the reins of de facto ASEAN leadership. Indonesia, the region’s largest country with the most political clout, is slowly moving beyond an ASEAN-centered foreign policy. According to Rizal Sukma, while ASEAN was once the cornerstone of Indonesia foreign policy, it is now only treated as a cornerstone. Without this complex multilateralism of different actors, ASEAN will remain beholden to individual member-state’s interests and limited in its actions in the foreseeable future.

The way forward for ASEAN is to stay true to its mantra of a “people-centered” community. However, to expect this from ASEAN while leaving its hybrid authoritarian member-states in the driver seat of regionalism is a misguided aspiration. Their fears of political change will hinder any move toward intervention and non-consensus decision making. To achieve this elusive community, the Southeast Asian people must take the reins. This means developing more innovative engagement strategies, making alliances with democratic governments and international actors, and strengthening regional coordination and capacities.

To ask whether there is a point to ASEAN is counterproductive. It reduces interest among ASEAN stakeholders and breeds negative attitudes toward engagement. The point of ASEAN does not hinge on what it is now but on what we, the Southeast Asian peoples, can make it to be. It has vast potential to do a great many things–balance superpowers, strengthen negotiation positions, build confidence among mutually suspicious states, cooperate against transnational human security issues, foster people-to-people connections, and even promote democracy and human rights. But to realize these potentials, as a comparative analysis of regionalism shows, requires the people to take ASEAN away from stubborn member-states and make it their own.

In 2017, the Philippines will be the chair of ASEAN in its 50th year. It is at the helm of setting ASEAN’s direction for its next 50 years. Being one of the more democratic states and having one of the most vibrant civil societies in the region, it is incumbent on the Philippines to lead ASEAN toward a new democratic agenda. After all, ASEAN aspires for a “people-centered” community. Such is the point of ASEAN—for it to be made the institutional mirror of its collective peoples’ aspirations.

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