The Strategic Importance of Asia Pacific : Strategy Management

• The Asia Pacific region
• The role of Asia Pacific in the world economy
• The limits of long-term growth
• Internal stability
• Asia Pacific and the outside world

During the first half of this century much of Asia Pacific was under either colonial rul or strong foreign influence. Malaysia and Singapore, then still united as Malaya, we British; Indonesia was ruled by the Dutch. The Americans governed the Philippines, ti French Vietnam, the Japanese Korea and Taiwan. Colonial rule came to an end in ti decade after the Second World War (except in Malaya, in 1957, and Hong Kong 1997.. While Europeans have generally left the region, US influence has expanded.

Relations between newly-independent countries and their former rulers a mixed. The Dutch have had difficult times in Indonesia, as have the Americans in t1 Philippines. The British sometimes find cooperation with Malaysia hard, and t Japanese are occasionally exposed to unfriendly gestures in Korea. As a new generati replaces those who lived through colonial times and occupation, relations becor shaped by today's economic and political realities, as well as the influence of t international media and tourism. Dutch and French have become irrelevant langua in Indonesia and Vietnam. English is the dominant language of business in Asia Pacil even among Asians, and the US dollar is the currency most frequently used.

There is a paradox here, bearing in mind Japan's overwhelming influence:

largest foreign investor as well as provider of technology, capital and aid in the regi largest foreign employer and number one exporter to most Asia Pacific countri Japan, which occupied most of Asia during the war, had to withdraw completely, h re-establishing itself through trade and investment links. But the USA remains stron committed, too (see Table 1.3.. About 50% of all foreign investment in Japan American.

Exports have made a major contribution to regional growth, rising faster tl anywhere else in the world: by 1995, Asia Pacific accounted for 26% of world exp (compared with 11% in 1965.. While Japan is by far the region's largest exporter,



*Cumulative Direct Foreign Investment; the picture is somewhat distorted as regional investors (from Hong Kong, Taiwan, China and Singapore) are excluded, though they play a very important role as

investors in Hong Kong, China and all the ASEAN countries. The true origin of such neighbourly investment is often unclear. Foreign investment is often redirected domestic investment

Source: UNDP (1996.

share in total Asian exports is dropping. This is due to the trade activities of Korean and Chinese firms, and to a shift of export-orientated manufacturing from Japan to other countries in the region.

By far the most important non-Asian destination for exports is the USA, which runs a major trade deficit with Asia Pacific; Japan runs a major trade surplus (see Table 1.4.. Because the USA is a major market, it exerts significant power over regional trade policies, as its endless trade disputes with Japan testify. Past arguments over the extension of Most Favored Nation (MFN) status to China, intellectual property rights in Taiwan and Thailand illustrate these countries' dependence on the USA. As the only remaining superpower and with a military presence in Japan and South Korea, the USA also provides security to the region, balancing the influence of Japan and the growing assertiveness of China. This gives Americans additional weight in government negotiations and explains why their taking a leading role in APEC (Asia Pacific Economic Cooperation) has been accepted.

A country's internal stability depends on its leadership structure, degree of social cohesion, and institutional and legal framework.

In Asia, the debate about internal stability is dominated by a deeply-seated belief that a strong government matters more than a stable constitution. A strong government is seen as essential to launching and

implementing successful development policies.

This view implies that political liberalism is not compatible with economic growth (since it is difficult for governments to make policy choices, such as privileging investment rather than consumption, under pressure from special interest groups). China, Hong Kong, Indonesia, South Korea, Singapore and Taiwan have all prospered under authoritarian governments, while democratic India and the Philippines fared comparatively poorly.

This view needs some qualification. China and Indonesia certainly prospered, although not during all periods of authoritarian rule. The Philippines has experienced swings between democratic and authoritarian rule, but has always provided more public services and justice for its people than China, for example. While India enjoyed political freedom, endless controls hampered economic activity. And how does one explain the economic success of democracies such as Japan and Malaysia, or the failure of authoritarian regimes in Myanmar or North Korea?

Two lines of thought emerge in the dispute between the supporters of democracy and those of authoritarianism. The first argues for a staged approach:

authoritarianism, it says, is needed to catapult poor, agriculturally-based countries into industrialization and a degree of prosperity. Only once societies become more complex do the shortcomings of authoritarian governments - often cornered in a closed political system by big business, the military and bureaucracy - become apparent. The better educated workforce and the emerging middle class will then face more demanding jobs that can be filled only by 'grown-up', responsible citizens whose active involvement in the economy inevitably spills over into society and government.

This change is accelerated by the media and increased contact with Western political culture. Germany made the transition to democracy during its phase of industrialization. Similar changes are taking place in South Korea, Taiwan and Thailand

- countries that are laying the basis for a stable future where their citizens can actively participate in further development.



According to the second line of thought, it does not really matter whether a government is authoritarian or democratic as long as it is good. But what is a 'good' government? One that cares about its people and ensures that food, health services, housing and schooling are available at affordable prices. One that is honest and competent, safeguards its people's security, and acknowledges the civil rights of the individual and his or her right to own property.

An appreciation of authority is fundamental in Asia; conversely, the accountability of governments is not widely thought essential. The role of law and the independence of the judiciary are controversial subjects. Supporters of authoritarianism see both as undue limitations of the power of the government. Democrats argue that

such a system of checks and balances is not enough and call for freedom of expressior a free press, a multi-party system and an elected parliament. Authoritarians see thes requirements as unreasonable restrictions imposed on leaders who are trying to do thei best. They add that good governments listen to their citizens while non-benevoler leaders are automatically removed by their peers.

Unfortunately, even a long-serving benevolent leader may change and trir against his people. He may also die unexpectedly with his succession unresolved, an chaos will follow. Blind belief in authoritarian leaders does not ensure internal stabilit3 Ethnic and religious divisions and economic disparities demand continuous an responsible government. This is best anchored in a strong legal and instimtion framework that includes provisions for accountability. In the long run it is laws an institutions, not individual leaders, that give citizens trust in their future and encourag them to identify themselves as a nation rather than with their racial or ethnic grout This aspect of internal stability must be taken into account when assessing the risl associated with foreign investments in Asia Pacific.

In the 1970s the Club of Rome warned that the world would soon reach the limits of

growth. Since then, Asia Pacific has been a textbook example in the growth of limits.

This, however, does not mean that its long-term future as a fast-growing region is assured. If the growth in output of Asia's developing economies was based mainly on a higher input of labour and capital, there is a risk that they will experience diminishing returns, and therefore lower growth rates.

There are others reasons for concern. While governments strive to remove infrastructure bottlenecks, the lack of some basic services and facilities may already be slowing down growth momentum. The planned improvements may be 'too little, too late'.

A major worry is the dramatic deterioration in the environment. Bangkok's traffic congestion is notorious, as is industrial pollution in Seoul and Taipei, and even more so in the industrial centres of China. As long as industrialization and urban agglomeration continue to increase, living conditions are unlikely to improve markedly. In rural areas, aggressive logging and expansion of arable land have caused soil erosion with consequent flooding, or even changes in weather patterns. This is forcing millions of farmers into increasingly overcrowded and unmanageable cities.

Population growth, while lower in percentage terms than in parts of Africa or Latin America, results in unbearably high population density. China grows by 16-18 million people a year - as much as the entire current population of Scandinavia. The annual increase for Indonesia is 3-4 million - the total population of New Zealand.

More careful use of energy is needed in order to sustain growth and save vital natural resources. Both China and Indonesia are on the way to becoming energy importers, thus joining Japan, the Asian NIEs and the Philippines in their dependence on Middle East oil supplies, with serious consequences for their foreign exchange balances.

Rapid growth of income gives rise to feelings of unfairness. Ostentatious consumption is envied or detested, materialistic goals are questioned. Industrialization and the liberalization of markets bring efficiency gains and higher productivity, but also the danger of growing unemployment, as in China and Indonesia. Governments must work hard to maintain a delicate balance between economic growth and the risk of social upheaval.

Quality of life is another important issue. GNP figures only reflect the creation of material wealth; they fail to measure the extent to which human lives are enriched. It is only this broader concept of increase in quality of life which one may call development. In other words, high growth rates do not necessarily lead to substantial development, though they certainly can help. Depletion of natural resources and exploitation of cheap labour can result in high growth rates, as can the accumulation of wealth through corruption among the elite.

The vision of governments as regards the future of their society, the way in which they invest in development and take care of the needs of people and the environment are foremost in assessing sustainable growth potential. The analysis of macro-economic data is insufficient for this purpose. But any broader perspective leads us into uncharted waters. How does one measure quality of life? How does one weigh the limited availability of space in Japan against its low crime rate, and compare these

two aspects with those in the USA? What role do climate, traffic conditions, the chanc of a fair trial, the quality of services play?

The United Nations Development Program (UNDP) has tried to get to grips wit] this topic for years.



It stresses the importance of an equitable distribution of the benefit of economic growth and the sharing of opportunities between individuals ani generations. It also argues that the creation and accumulation of wealth do nc necessarily fulfil important human choices: it is the use of wealth, not wealth itself th determines the quality of life. Respect for the law, maintenance of minority rights, eqm treatment of men and women do not depend on wealth. Some Asia Pacific countries d not grant these conditions to their people, even if they claim to do so.

In an attempt to compare countries with each other, the UNDP has created Human Development Index (see Table 1.2. with only three components: longevity education and standard of living. Longevity is taken as an indication of health cart education as an indicator of providing people and society with an opportunity t improve themselves, and standard of living as an indicator of well-being. The UND] ranks a total of 173 countries around the world, first using the HDI, then using incom per capita. About half the countries in the region see their standing considerabl' improved when the HDI is applied. This means that they have been comparativel more successful in pursuing development in a broader sense than in simply improvin their people's income in dollar terms.

The easiest way to compare the size of economies is to look at their gross national product (GNP).

This is arrived at by adding up the income of all participants: wages and salaries, rents, interest, profits and so on.

This income is either spent on private or public consumption, or on investments, or is saved.

Consumption and investments is the demand for products and services in the economy.

Income saved is channelled back as demand, as long as the savings are given to financial institutions which in turn lend to domestic creditors.

This simplified economic model allows us to use GNP data as overall indicators of demand.



According to the World Bank, Asia Pacific's total GNP in 1995 was about US$7.

1 billion - about the same as that of the USA, and about 90% of that of the 15 economies of the European Union (see Figure 1.

1 which shows GNP levels for the Asia Pacific countries and India).

The problem with these comparisons is that the USA, and even the European Union, are fairly homogeneous markets while in Asia Pacific, the multinational firm faces 11 distinct markets with substantial geographic distances and differences in industrial sophistication, purchasing power and consumer behaviour.



Most Asian countries either have a large population, but with relatively little spending power, or a small, fairly affluent population.

Apart from Japan (which accounts for over 70% of Asia Pacific's GNP), individual economies are relatively small

The GNP of Singapore or Malaysia is probably not much larger than that of Boston or Munich, and Indonesia's economy smaller than that of New York.



These two traits do not make Asia Pacific attractive for the Western firm (except Japan, of course, but it is often seen as a closed market).

A series of small markets, each with its own structure and regulations, requires a lot of management attention, and that usually implies high overheads.

There are several reasons, however, why Western firms should not ignore the region:

GNP data must be interpreted with great care, even if they come from institutions such as the World Bank, the International Monetary Fund (IMF) or the Asian Development Bank.

In the early decades of the twentieth century, much of Asia was still called di East - a region remote from its European colonial masters and the USA.

It pm the West with raw materials and in exchange received small quanti

manufactured goods.

Trading houses established in the nineteenth century flouri enterprising industrialists set up factories in Japan, China and other countries; othe the Far East remained on the edge of the world economy.



Japan became an industrial country in the 1920s and 1930s, exporting n quantities of cheap watches and textiles to the West. By 1941 it felt strong enou attack the world's most powerful nation, the USA.

Japan was an exception ii region: China, once a leader in many technologies, was in a shambles, and mo Asian countries had been exploited rather than developed by the colonial powers.

After the war, Japan had to rebuild its shattered manufacturing base.

I communists had taken over Shanghai, driving out entrepreneurs to Taiwan and I Kong. Korea, with an average income lower than Sudan's, was split in two al devastating war. Manila, Rangoon and Saigon, however, flourished, promising a era in Asia.

Much has changed since then:

Japan has become a highly developed country, challenging US leadership in a number of industries. The newly industrialized economies (NIEs) of South Korea, Taiwan, Hong Kong and Singapore are among the most successful economies in the world; with sustained growth rates of 7-8%, their gross national product (GNP) doubled each decade. Today, they are the only developing economies likely to catch up with industrialized Europe and North America in terms of technology, infrastructure and per capita income.

ASEAN member countries Indonesia, Thailand and Malaysia also showed a consistently good economic performance. By improving their infrastructure and building up substantial manufacturing sectors, they reduced their dependency on raw materials and agriculture. People in these countries, as well as in the Philippines, today enjoy much better standards of living than those in the overwhelming majority of Third World nations. Vietnam, which recently joined the ASEAN group, shows equally strong growth.

In the late 1970s China opened its borders to foreign technology, trade and investment.

As pragmatism increasingly overruled ideology, it became the fastest growing economy in the region (it did admittedly start from a very low base, like Vietnam).

Economists, journalists and business professionals widely use the term Pacific', though which countries they refer to is often unclear. Japan, the NIEs. the ASEAN members (ASEAN 5. and China are what we call Asia Pacific. This tel widely accepted - even if implyrng that Singapore lies on the shores of the Pacific stretches geographic credibility.

The division of Asia Pacific into four groups (Japan, the NlEs, the ASEAN 5 and China) reflects economic development patterns rather than political affiliations. singapore - an ASEAN member but whose development followed more closely the model of newly industrialized countries - we place in the same subgroup as South Korea, Taiwan and Hong Kong.

Economic and political systems in Asia Pacific are by no means homogeneous. officially at least, the Chinese economy still follows socialist principles, while Hong Kong and others are a capitalist's paradise. Macroeconomic data also vary widely.

In 1995 Indonesia had 190 million people with per capita income of US$980; neighbouring Singapore had a population of less than three million with an average income of US$26,730. Japan, with 16% of the world's economy, has only 2.3% of the world's people while China, with more than a fifth of the world's population, contributed a mere 2.3% to world economy.

Despite these huge variations, a number of common characteristics can be found:

Asia Pacific countries all aim at improving economic well being through individual efforts. They share a high degree of entrepreneurship, a determination to progress, high savings rates and substantial private investment in assets and in education.

They are led by business-minded, outward-looking governments that support wealth creation through moderate intervention and policies orientated towards economic growth.

These countries are consensus-orientated: efforts and results are shared within the nation, the local community, the firm or the family; income distribution is relatively even.

A rather vague feeling of 'Asianness' - best described as being neither Caucasian nor African nor Latin American - is emerging, encouraged by regional media and growing contacts among communities.

The economies of Australia and New Zealand, while deeply intertwined with Asia Pacific, are not Asian in culture and don't have the same growth momentum. India is not part of Asia Pacific either, because of geographical distance, and a lack of economic and political ties. India, which opened up to the outside world only recently, has shown little interest in closer involvement with Asia Pacific.

Western firms and economists find it difficult to determine which countries to include in the region. Some follow our rather narrow definition; others include Australia and New Zealand. Alternatively, they use the much broader term of 'Asia'. But what is Asia? If it begins in Turkey and ends with New Zealand to the south and Japan, or even Siberia, to the north, it is not a very useful concept from a business perspective.



This article deals mainly with Asia Pacific - only a part, though by far the most dynamic, of Asia. With 1,700 million people, it is home to 31% of the world's population. Asia Pacific reaches from the cold deserts of northem China to the tropical belt of the ASEAN countries; it is so spread Out that a direct flight from Singapore to Tokyo takes more than seven hours. Indonesia alone extends over an area wider than the distance from Paris to New York. As the millennium nears its end, however, Asia Pacific accounts for 25% of the world's output. This figure is due to increase, but not overnight.