Facing Up to China
	To compete, Southeast Asia must crank up its domestic economies
	By David Fernandez

Posted Monday, June 30, 2003; 21:00 HKT
In the past six years since the 1997 financial crisis broke in Asia, three major Southeast Asian economies have used the International Monetary Fund (IMF) as a crutch. But the time has come for them to stand on their own. Within weeks, Thailand will have paid up all the bailout money it owes the IMF, and by year's end both Indonesia and the Philippines intend to emerge from the multilateral organization's oversight. Can they survive? Yes, if they—as well as other Southeast Asian countries—rely on themselves to grow, and not on advice from an outside body.

The IMF doesn't help that much anyway. What it teaches are the basics: state ownership is bad; free markets and free trade are good; collect more taxes; don't spend your last dollar defending a hopeless currency peg—that sort of thing. Some of these lessons, preached as gospel truths, don't apply in every case. In other words, an IMF diploma might not necessarily equip a nation for global competition.

For one thing, it won't blunt the challenge from China. Not only is China hoovering up all the foreign direct investment that might otherwise have gone Southeast Asia's way, but the mainland continues to flout IMF advice to relax its currency peg. In this current weak dollar environment, that means it also enjoys a pricing advantage over most of the rest of Asia. China's entry into the World Trade Organization means Southeast Asia has a new market for its commodities and agricultural products, but going head-to-head with the mainland elsewhere looks certain to devastate the region's textile, clothing, footwear, toy and, most frighteningly, electronics producers. Even the plan to establish an ASEAN-China Free Trade Area by 2011 isn't great news because of the difficulty of implementing meaningful tariff waivers on the unwieldy 10-member ASEAN.

So, realistically, Southeast Asian economies should do what's best for themselves, individually, not as a group. Thailand should follow Singapore's lead and forge its own free-trade-area agreement with the U.S., as well as further encourage domestic demand. Indonesia needs to develop its vast natural resources and undercut its neighbors by capitalizing on its still cheap manufacturing work force. The Philippines must fully harness the competitive advantage of its well-educated, English-speaking workers. Malaysia must cultivate its small- and medium-size enterprises even though its government cherry-picks logistical services from next-door Singapore. And Singapore should push on with its specialized industries such as biotechnology and pharmaceuticals.

Though exports remain critical for Southeast Asia, if there is a common shift in approach, it is a focus more on the local consumer as an engine of growth. But beyond that, the answers for Southeast Asia's economies are as diverse as the membership of ASEAN. And the answers can't be found in any IMF textbook.

David Fernandez is the head of Emerging Asia Economic and Sovereign Research at J.P. Morgan

	Poisonous Minds [June 18, 2003] As Asian governments crack down, terrorists may be adopting frightening new tactics The Hard Cell? [June 9, 2003] Thailand joins the war on terror by busting up a plot to bomb the country's tourist playgrounds The Killing Season [March 10, 2003] Thailand's swift, popular crackdown on drugs has claimed more than 1,000 The Gathering Storm [January 20, 2003] Many Asians are voicing strong opposition to the Iraq conflict. This time the stakes are higher More Related Items | Search all issues of TIME Magazine