October 1999

Asia, out of the dark?

Asia, the Asian-Pacific area has been severely hit by an economic crisis in 1997. The economies collapsed, fortunes lost and unemployment started to rise. The positions of many governments became unstable as quick solutions were not available. Some could stabilise after some time and IMF support packages, even if the IMF advice was very often doubtfull. Other countries, especially in Indonesia, the crisis revived internal problems. The political and economical weakened governments came under pressure from interest-groups or more dangerous the independence movements. The government and the independence movements reacted violently to enforce there very often maximum demands, political solutions were simply impossible in this situation. And finally the crisis has been the cause that differences between some countries were intensified and became more tensed than ever before.

The main question now is: has there been, after two years, a recovery of the economic situation, could the internal political problems be solved, have the inter-state tensions diminished or has there been a deterioration of the situation? We will give a summarized review of the countries who were or are most in distress.

The northern Asian Pacific area

This region includes China, Japan, the Koreas, the Philippines and Taiwan. The Koreas have been severely hit by the economic crisis and Japan and the Philippines have been just moderately hit by the economic crisis. China and Taiwan have been able to avoid the major consequences of the economic crisis. But all, except Japan, have some political problems which could become more dangerous in the future.

The problems of the Philippines are largely internal but the problems of China vs. Taiwan and North Korea vs. South Korea have an inter-state character and are potentially more threatening and destabilising to the region.

Japan

The situation in Japan has seen an improvement over the last nine to twelve months. The negative growth situation of 1998 seems finally to be turned around in a small growth figure of 1 to 1,5 % for 1999. This improvement is reflected by the Tokio stock market as the Nikkei 225 index is approaching levels of pre-1997, or above 17.000 points. This shows an increased trust in the capabilities of the Japanese economy and an indication that the improvement will at least continue in the next half year. The Japanese economy is recovering from the recession but their remains a but. The problems in the economy and the in western eyes sometimes peculiar way of doing business in and between companies are not yet eliminated and this, together with the expensive yen and high national debt, might delay a full recovery.

Japan is experiencing a recovery after approximately a decade of very limited and negative growth. Finally things seems to improve and the whole Asian Pacific region is showing growth and improvement over 1999. As mentioned before in this report series if Japan recovers Asia will recover. But the region in question should not forget to solve and eliminate the problems and weak spots in the economies of nearly all countries in the region, including Japan.

North Korea

The economical situation in North Korea is much worser and probable the worsest of the region. This has nothing to do with the recent Asian investment, debt and currency crisis but with the political and economical system of North Korea. The entire North Korean production system, agricultural and industrial, is outdated, ineffective and essentially bankrupt. This situation was aggrevated by the recent natural disasters which delivered the final blow to the North Korean economy. The only more or less functioning parts of the North Korean production capacity have been the missile and weapons of mass destruction facilities. And ofcourse the intelligence/secret police, suppression, apperatus but this will be hardly supportive to economical well being of the country.

The North Korean population is threatened by starvation, the production is not showing any improvement and the tensions with South Korea have reached levels which can described as close to hostile and conflict. But the relations with other countries have become worser too. It seems as the internal situation deteriorates the relations with South Korea and to a lesser extent the USA are reaching new lows.

The relations with the USA got worser as there was a difference about the interpretation of an agreement between North Korea and the USA, South Korea, Japan and the European Union. In short, North Korea would stop the construction and use of two or three nuclear High Enriched Uranium power plants and would allow a number of inspections into North Korea in exchange of fuel, food and two modern Low Enriched Uranium nuclear power plants. As North Korea continued research into nuclear weapons at another site and refused inspections at some places where as at the same time a number of deliveries to North Korea were late or were simply not delivered there was an increased tension between the two sides. The disagreement about the interpretation could be more or less solved and the program seems to be on track again but the recent test firings of medium and long range ballistic missiles and the actions of North Korea in disputed waters put the North-South case back on the international political agenda.

The naval maneuvers and the sinking of some North Korean fishing boats and naval craft by the South Korean navy in the Yellow sea between China and the Koreas in a by North Korea disputed area has deteriorated the relations between the North and the South to the utmost. War would be a step to far but the end of diplomatic relations and to put the armed forces on a higher alert status has been the result.

The political bartering, sometimes better described as black mail, with the USA to receive additional funds has been more or less succesfull and improved the relations between the two but it did not limit the tensions in the region. The relations with Japan continue to be worse as Japan feels insecure after the last test fire of a long range ballistic missiles, Teapo Dong 1, which has overflown Japan. The North Korean promiss not to have any new tests, as long as the negotiations with the USA continue about the improvement of their relations, did not take away the Japanese feelings of insecurity.

Concluding, it can be stated that the Korean peninsula remains a highly unstable place. The differences between the two sides remain agressive and at times confrontational. The very bad economic situation in North Korea will most likely increase the tensions between North and South Korea. The actual problems about the implementation of the nucluar power agreement, the differences on interpretation of the demarcation line in the cease fire agreement and the essential non-issue themes of the economic problems, the brinkmanship games to receive financial and material support from South Korea and the west and the wish to create an outside enemy will keep the relations of North Korea with the rest of the world tensed and difficult. War will be a step to far and thus unlikely but continueing tensions and non-cooperation will be very likely on the short term.

South Korea

The situation in South Korea has improved over the last year. The economy is showing some improvement as the exports increased, currency stability has returned, debts been rolled over, the number of bank-rupties have stabilised and the closure of the smallest and weakest of the large conglomerates, Cheabols, and the restructuring of the large Cheabols have been implemented.

Economically South Korea has achieved a big improvement but the problems with North Korea seems to have become larger and more dangerous as the problems in North Korea have become worser. South Korea must remain alert against Northern incursions of intelligence units and mini-submarines and since recently larger operations, like the naval skirmishes in the Yellow sea, which should test the Southern’s defence capabilities and willingness and will increase the tensions between the two neighbours. This, as mentioned before in the part of North Korea, to create a foreign threat to avert the people from the internal problems and extort additional means, support, from the South and the west. The situation will probably not escalate as the Northern position is much to weak to succesfully launch and survive an assault on South Korea. Even as a option of last resort it is very unlikely, they are simply to weak militarily and economically to execute and sustain a long term operation.

Tension, bad relations and probably an increase of tensions and small scale harassments will be very likely on the short term but only with the goal to receive additional support. A war will be avoided as this would mean the end of the regime in North Korea.

The Philippines

The situation in the Philippines is more complicated. The Philipinnes had the advantage not to be a direct casualty of the 1997 Asian crisis as they were less involved in the Asian economic miracle. But the Philippines have got their own share of problems beside the negative fall out the Asian crisis which never the less had a large impact on the currency and the stock market.

The economic development of the Philippines have been slow and several times delayed by external and internal problems. The external problems have been and are a lack of trust in the Philippine economy and capabilities. The internal problems are about the changes of successive more or less weak, or better indecisive, governments, the autonomy and independence movements, the still active communist party and the inertia, lack in support, of entrepreneurship in the country.

The economy of the Philippines have shown in 1999 some improvement. Internal induced growth, better government support and policy and a slow return of foreign investment in the Philippines have been the main causes of the growth. This trend is most likely to continue in the coming years as the whole region is returning to their former strength.

China

The largest and most populous country of the region has not been hit that dramatically as the majority of the other countries in the region. The absence of large sums of short term foreign debt, the controlled currency and no large scale property speculation saved China from the economic collaps in 1997/98.

The consequences of the Asian crisis were for China in the first place indirect as the foreign investments into the region, including China, decreased and through the worsening of the Chinese market position as the other countries products became cheaper.

The medium to long term effects of the crisis are much worser. The consequences will be negative economically and politically, internal and external. Economically the lower investments into China will endanger the development plans of the Chinese government. They need at least an average annual growth of 8 % to absorb the rural population into the urban areas, to provide some kind of work and improve the industrial and financial institutional base. The lack of investments and the lower growth figures will make the inefficiencies, or better the close to bankrupt position, of the majority of the Chinese companies and the financial system of China more visible. The consequences of the close to bankrupt companies will mean an increasing number of lay offs as it will become increasingly difficult to continue financing loss making companies.

The economic problems will thus increase in the future as the foreign support will not make good the many structural deficiencies in the Chinese economy. A short and small improvement of the growth figures might be possible as the region will improve but a downturn trend will be unavoidable if another investment boom will take to long to return and if the government does not implement a total overhaul of the economy.

Politically the forecasts are also negative. Internal problems are bound to increase as the government cannot satisfy the demands of the population to at least deliver a chance for survival, with other words a job, food and living quarters. Especially in the interior provinces the economic situation is deplorable. The coastal regions offer some better circumstances with a few of the better government owned companies, the joint ventures, the foreign production facilities and the little group of small entrepreneurs but again not enough to satisfy all and certainly not the whole country. These social-economic problems will lead to unrest and consequently to an even worser economic performance.

The weakened government will be more endangered to actions of the autonomy/independence movements in Tibet and Xinjiang provinces. They will use the problems of the government to their benefit. With the use of force the Chinese government might be able to suppress the movements on the short term but they cannot afford it financially to continue it on the long term and violence and social unrest are the perfect pre-conditions to scare off foreign investors and destroy economic growth.

The external political problems will also increase as all neighbouring countries will use the Chinese weakness to improve their position in the territorial differences they might have with China. You could think about, the Paracel islands, the Spratly Island group and ofcourse Taiwan.

A good example of the weakness and the coming political problems for China are the reactions on the recent Taiwanese statements of treating the two as essentially two countries, a covered explanation that the one China idea is dead, did not lead to the more usual aggressive reactions of China. As China is at the moment and in the next 10 to 15 years economically, politically and militarily not able to force their will on Taiwan. They can use some diplomatic pressure, their seat in the security council and big statements but that is essentially all.

China is a promising country but many changes need to be implemented and ifs overcome to become prosperous. It will take at least one or two decades before China will be in the position they want to be in: superpower status. During the Asian booming years and the days of double digit growth the goal seemed to be close. Accordingly was the behaviour of China. It considered itself at least as a large power that could dominate its neighbours. The Asian crisis made the problems of China visible and the world and probably the Chinese leadership aware of its weakness.

Taiwan

Taiwan has not been particular hard hit by the Asian economic crisis. The stock market dropped but it had not any large impact on the economy. The recent earthquake will have a much larger impact on the performance of the economy.

Taiwan’s economy remains one of the better performing economies of the world and this will continue to be the fact. The earthquake will cause some short term problems as parts of the infra-structure and living areas have been severely hit but this can be solved within two to three years. The economic damage can be limited if the power supply to the all important tech-industry can be repaired as fast as possible. Taiwan’s silicon valley has received no large damage and is only hampered by the irregular power supply. Taiwan’s problems are politically.

The status of Taiwan is uncertain. As long as Taiwan considered itself as part of China and claimed the leadership, the other side was considered the usurper of power, the one China idea remained valid. China’s feelings about Taiwan are identical, Taiwan is the renegade province. This started to change as Taiwan became economic succesfull and afterwards became a democratic country. Taiwan has developed itself into a country with all necessary qualities which are usually associated with an independent state. The only missing aspect has been a declaration independency and ofcourse international recognition.

Every attempt or even intention to declare themselve independent was met by China with threats that they would use all measures available to stop it. They even stated that they would forcefully bring back Taiwan into China if this would prove to be necessary. Even other countries have been punished by China if they would allow Taiwan to open an embassy or have diplomatic relations with Taiwan.

Until the Asian crisis the Chinese threats and the uncertainty in the Taiwanese population have Taiwan refrained from declaring independency. The changed perceptions of the Taiwanese population, the economical and political problems of China and a reassessment of the Chinese military capabilties changed this attitude.

In a speech the Taiwanese president declared that it would be best to treat Taiwan and China as two seperate entities. This covered declaration of independency has been the first step to formal independency. A test balloon to see how China and the world would react. China’s reactions were relativily mild as Taiwan took the opportunity at a time were China is clearly economically and militarily inferior to Taiwan. It is a window of opportunity for Taiwan, China temporarily weakened and still far away from being a large power.

Taiwan is one of the economically better performing countries and they wil certainly benefit from the re-emergence of economic growth in the Asian area. Politically there is a problem with China. But it is now the right time for Taiwan to change the situation as they did. China could overreact and try to invade Taiwan or blockade the harbours. The first option is impossible because the Chinese armed forces simply lack the resources to execute such an operation. A naval blockade will also prove to be very difficult as the Chinese navy is not the most advanced, except the Sovremenny-class destroyer and the Kilo type 877 and type 636 submarines but with which they have some difficulties to operate, and are in essence inferior to the Taiwanese navy. And this could start a much more dangerous development, what if the Taiwanese navy would blockade Hong Kong, Shanghai and some other harbours. The Chinese economy would be very much in distress. War is at the moment no option for China and therefore very unlikely.

The Southern Asian Pacific area

The countries in the Asian South Pacific area were the most hit by the Asian economic crisis of 1997. Not only the stock markets plummeted but also the property market, the currency, the production and all other dreams about the much clamoured superior Asian way to become a developed nation.

Most of the countries, except Indonesia, could economically recover since the crisis but they are still far away from the pre-1997 days of wealth. All had their own way to recovery and in short a combination of time, prudent government policy and spending, roll over of debts and IMF support packages delivered a return to growth.

Vietnam

Vietnam did receive only limited damage from the Asian financial crisis. Vietnam possessed relatively little short term debt, no large property speculation and a small an underdeveloped stock market. The consequences of the crisis have been indirect as foreign investors lost the trust in the Asian economies.

The slack in foreign investments and probably more importantly the slow and hesitant policy of the government to initiate further reforms to stimulate the economy have suppressed economic growth. The government remains the largest obstacle to an increased development of the economy and the society in general. The fear to loose control makes the government very carefull and hesitant.

The Vietnamese economy has improved a little since the crisis but cannot use its full potential because of the suppressive and controlling regulations and the government. Until the government participates actively in the restructuring of the economy, growth and progress will not be achieved.

Thailand

The country which has been hit first by the Asian crisis was Thailand. The mismanagement and the bad sides of the Asian tiger economies became first visible in Thailand. All dreams of a quick and flawless development were destroyed within a couple of days.

The currency, the stock and property markets and the industrial production collapsed because of the financial mismanagement and the long overestimated economic capabilities of Thailand.

Saving programs, IMF packages, proper government policies and a partly restructured economy have delivered a better environment. Growth has returned to Thailand and promisses to continue in the coming years.

The worsest problems of and in Thailand are over and/or solved but a return to the days of abundance of before 1997 will take some more time. But a same kind of abundance will never return as the financial regulations have been improved and the investors will be more carefull where and when to invest.

Malaysia

Malaysia has been very hard hit by the Asian economic crisis. The currency, stock and property markets collapsed because the same ills as in the majority of other Asain tiger existed in Malaysia.

The reaction to the crisis has been however different than of the other countries. Malaysia has been the main player/backer of the superior Asian way development idea and suspected a western inspired plot behind the Asian crisis. Therefore Malaysia rejected any western or IMF conditions and advice to solve the crisis.

Malaysia introduced a controlled currency market to stabilise the currency and cut back the many very ambitious, but also very doubtfull, development programs. As the country calmed down and the region started to stabilise some growth started to return.

Malaysia is out of the worsest problems and will continue to grow in the future. Especially now the whole region is improving. The IMF has because of the Malaysian success loosened its aversion to money controls and would like to cooperate with Malaysia to stimulate further improvement and economic growth.

Singapore

Singapore is one of the most developed nations in the region. The consequences of the Asian economic crisis have been limited in Singapore. As the stock market lost much of its value and the economic growth was minimalized the currency remained stable.

The stringent Singaporean regulations and the advanced economic structure saved Singapore from the disasters occurred in large parts of Asia. Economic growth returned therefore very quickly as the region showed the first signs of recovery. Singapore will profit from every further improvement in the region. It will receive a little negative impact and some additional refugees out of Indonesia as the problems seem to get there larger by the day but the overall situation will not be damaged by it. As Indonesia is a total different ball game as it is and was not very integrated in Asian development process.

Indonesia

The country which have been hit the most by the Asian crisis, economically and politically, is Indonesia. All the problems which existed in the other Asian countries like the lack of regulations and financial controls, the ill/wrong directed investments, an underdeveloped economic structure and a culture of nepotism can be multiplied for Indonesia and add to that the political problems of aggressive autonomy/independent movements, doubtfull government policies and a centralised, militarised and ineffective government structure and you have a description of Indonesia.

Nearly everything in Indonesia collapsed because of the economic crisis. The stock market, the currency, the production, business activities and partly the government all lost their value or functionality. Despite the IMF advice and support packages the free fall of Indonesia could not be stopped. The economic downturn could be delayed because of the international support but the political problems pushed the economy further down hill. The Indonesian economy is in a depression, the country is falling apart and violence is set to increase.

The Indonesian economy is in very bad shape as large parts were political guided, overdebted and absolutely unfit to operate and compete on the world market. The economy has experienced negative growth since the Asian crisis started. The shrinking of the economy will continue for some years as a very large number of problems have to be solved, economical and political, before growth will return.

Beside the rotten economic structure there are at least two other problems which undermines the stability of the country which in turn undermines the economy of the country. The internal political structure is very weak as it depends on a small poltical elite and the military for its survival. Both are not very popular with the Indonesian and Javanese population as became clear as a law proposal to increase the power of the military resulted in agressive demonstations of students who dislike any increase of power to the ruling elites or better the military.     Indonesia’s other large problem are the several movements in this island and population rich country which demand some kind of autonomy or even independence from the central government in Jakarta.

There are at least four regions in which the differences between the central government and the local people, movements, have escalated beyond the possibility of reaching a political compromise. And this could be only the beginning as more peoples on the island and people rich country get ever more dissatisfied with the government in Jakarta. If Indonesia does not get its act together and offers within the next two years an satisfactorily solution, e.g. an economic recovery and a sharing of power, to the people living outside Java the country could eventually fall apart.

The four regions which are the most active and most suppressed by the government are Aceh on northern Sumatra, east Timor, Irian Jaya and the Moluka islands. The situation in the last two, Irian Jaya and the Molukas, is relatively calm in comparison to Aceh and east Timor. The people in Irian Jaya support the independent movement OPM and they are moderately active in their actions against the Indonesian government. The differences on the Molukas between the muslim Indonesian, Javanese, immigrants and the original christian population have calmed down but the Moluka people support the autonomy/independent movements on the islands. The comprehensive suppression system, read the army, could until now keep the situation under control. Limit the actions of the OPM on Irian Jaya and refrain the peoples on the Molukas from killing eachother.

The referendum on east Timor, something the other regions would like to have too, has been a kind of cease fire agreement which kept off the independent movements from any serious actions and confrontations. The outcome of the referendum and the subsequent reaction of the Indonesian government and especially the army will however intensify the actions of the several independent movements on Irian Jaya and on the Molukas. The forced mass evacuations and suppressions after the referendum will not scare off the people but will on the contrary only increase the willingness and actions of the independent movements. As living under Indonesian government is living insecure and suppressed by the army and Javanese policy.

The situation in Aceh has been much more violent. As Aceh is economically very important to Indonesia, 30 % of Indonesia’s oil poduction comes from Aceh, they want to keep the region within Indonesia. They can not economically afford it to loose this area and they will do a lot to keep this region under control. The government is stating that they will fight till the end, if necessary, but so does the independent movement Aceh Merdaka, free Aceh.

The Aceh Merdaka is more active than ever before. Aceh Merdaka is increasing the number of assaults against Indonesian installations and security units. And the movement has received additional arms and more importantly several hundred, at least 600, fighters who returned to the region after having been trained in Libya. The quality and quantity of the Aceh Merdaka is improving and this will have an effect on the fighting against the Indonesian security forces.

As a result even the hard suppression methods and the renewed introduction of special forces of the Kopassus into the region could not turn the tide. Indonesia is having more difficulties to control the region and is set to lose more men than ever before. The Indonesian security forces are less effective in suppressing the independence movements because they have to fight more or less a fairer war than in the days of the Suharto regime. A return to the old methods of torturing and random killing would be difficult as this would meet a lot of international resistance and eventually the recognition for the people of Aceh that they should be independent.

The Indonesian government is now pursueing a twin track strategy in the Aceh region. Beside the actions of the security forces the Indonesian government in the person of general Wiranto has recently made some pacifying gestures towards the Aceh Merdaka.

The twin track strategy is in the mean time a clear sign of the willingness of the Indonesian government to compromise and a wish to end the violence. The time for compromises is however over as Aceh wants to be independent. They are much to radicalised to compromise and the Aceh Merdaka will probably consider any gesture of the government as a sign of weakness or a trick. Offering something now to suppress them some time in the future if the position and chances have improved for the security forces.

Finally east Timor, the referendum about the future of the region which promised to solve the tensions in this part of Indonesia has turned out to be a farce. The outcome of the referendum has been a disappointment to Indonesia. The population voted for independence, Indonesia accepted the result and started to withdraw but the pro-Indonesian militias started, with support of the Indonesian armed forces, to spread terror and forced the majority of the population to run for their lives. As the population dwindled and if Indonesia can keep the refugees in Indonesian controlled west Timor then the majority who voted in favor for independence will become less and less.

The arrival of the UN authorised force INTERFET, Intervention Force East Timor, under Australian command could initially only restore order in and around the capital Dili. Only after the hand over of power from the Indonesian army they can spread out over the whole region, country. As fast as possible they will try to restore order, demilitarise/disarm the pro-Indonesian militias, feed the refugees and install some kind of civilian government.

The willingness of Interfet to restore order became clear by the arrest of a leader of one of the largest and most feared pro-Indonesian militia Aittarak, who wanted to start negotiations with Interfet about the future of the region after the Indonesian withdrawal.

Aittarak and the other militias possibly want a new referendum under more favorable terms now the majority of the east Timorese population has fled to the mountains or west Timor or have died by the terror of the militias. Or if that is not possible a partition of east Timor into a pro Indonesia part and an independent part.

The threat of a guerilla war between Interfet and the pro-Indonesian militias will be unlikely and if it happens it will be short and not very succesfull. They are to small, to weak and lack the necessary internal and external support to make a large impact. And any actions of special units of the Kopassus will also be unsuccesfull and rather dangerous. If they would be apprehended by the Interfet Indonesia would be in big trouble. Indonesia is thereby hardly in the position, politically and economically, to support a guerilla war and cannot afford to many additional problems, costs and embarassments.

Indonesia will not receive any credit from the people living in east Timor, even not from the pro-Indonesian groups in the future. The Indonesian army has taken, during their withdrawal, everything they could carry with them and burned and destroyed everything they had to leave behind. East Timor, not the most developed places in Indonesia has been thrown back to the stone age. Everything, even the majority of the houses, need to be rebuilded to become a more or less civilised and urban society again.

The idea behind the combination of terror and the total deconstruction and destruction of everything valuable of a region is that it should scare off potential other regions and people in Indonesia from demanding secession from Indonesia. This policy in east Timor should be a warning sign to others but most likely the opposite will happen. The autonomy and/or independent movements will become even more determined in their struggle to secede. Everything less then independency will be unacceptable and the movements will be very attentive to every move of the Indonesian armed forces. Another campaign like the one in east Timor will receive more opposition and a agressive reaction from independent movements in Irian Jaya, Moluka islands and in Aceh. Any compromise like now desired in Aceh will be very unattractive as nobody would cooperate with somebody that unreliable, treacherous and agressive as the Indonesian military and its rather unpowerfull political masters.

The internal problems of Indonesia with a weak government, its doubtfull economic policy, the accumulation of power in Jakarta and in the hands of the military and the agressive and violent policy of Indonesia in the troubled regions will scare off foreign investors and destroy any chance on an economic improvement in Indonesia. Indonesia has a long way to go to achieve stability and economic growth and any mistake will be paid for dearly by Jakarta.