ASEAN Industries and the Challenge from China

ASEAN Industries and the Challenge from China

Also by Darryl S.L. Jarvis INFRASTRUCTURE REGULATION: What Works, Why, and How Do We Know? Lessons from Asia and Beyond (co-edited with Ed Araral, M. Ramesh & Wu Xun) INTERNATIONAL RELATIONS AND THE CHALLENGE OF POSTMODERNISM: Defending the Discipline INTERNATIONAL BUSINESS RISK: A Handbook for the Asia Pacific Region (edited) INTERNATIONAL RELATIONS AND THE “THIRD DEBATE”: Post-Modernism and its Critics (edited) INTERNATIONAL RELATIONS: Still an American Social Science? Toward Diversity in International Thought (co-edited Robert M. Crawford)

Also by Anthony Welch EDUCATION, CHANGE AND SOCIETY first and second edition (with R. Connell, C. Campbell, M. Vickers, D. Foley, and N. Bagnall) AUSTRALIAN EDUCATION: Reform or Crisis? (published in North America and Europe as Class, Culture and the State in Australian Education: Reform or Crisis?) THE PROFESSORIATE: Profile of a Profession (edited) GLOBALIZATION AND EDUCATIONAL RESTRUCTURING IN THE ASIA PACIFIC REGION (co-edited K-H. Mok) QUALITY AND EQUALITY IN THIRD WORLD EDUCATION (edited) TRADITION, MODERNITY AND POSTMODERNITY IN COMPARATIVE EDUCATION (co-edited with V. Masemann) KNOWLEDGE, CULTURE AND POWER: International Perspectives on Literacy Policies and Practices (co-edited with P. Freebody) CONTEMPORARY PERSPECTIVES IN COMPARATIVE EDUCATION (co-edited with R. Burns) HIGHER EDUCATION IN SOUTHEAST ASIA: Blurring Borders, Changing Balance

ASEAN Industries and the Challenge from China Edited By Darryl S.L. Jarvis Anthony Welch

Introduction, selection and editorial matter © Darryl S.L. Jarvis and Anthony Welch 2011 Individual chapters © contributors 2011 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No portion of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, Saffron House, 6–10 Kirby Street, London EC1N 8TS. Any person who does any unauthorized act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2011 by PALGRAVE MACMILLAN Palgrave Macmillan in the UK is an imprint of Macmillan Publishers Limited, registered in England, company number 785998, of Houndmills, Basingstoke, Hampshire RG21 6XS. Palgrave Macmillan in the US is a division of St Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010. Palgrave Macmillan is the global academic imprint of the above companies and has companies and representatives throughout the world. Palgrave® and Macmillan® are registered trademarks in the United States, the United Kingdom, Europe and other countries ISBN 978-0-230-54234-1

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This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. Logging, pulping and manufacturing processes are expected to conform to the environmental regulations of the country of origin. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data ASEAN industries and the challenge from China / [edited by] Darryl S.L. Jarvis, Anthony Welch. p. cm. Includes index. Summary: “This book explores the impact of the rise of China on South East Asia, addressing the consequences for some of Asias key economic sectors, including educational services, bio-technology, financial services, and the food industry” – Provided by publisher. ISBN 978–0–230–54234–1 1. Southeast Asia–Economic conditions 2. China–Economic conditions–2000–. 3. Southeast Asia–Foreign economic relations–China. 4. China–Foreign economic relations–Southeast Asia. I. Jarvis, D.S.L. (Darryl S.L.), 1963– II. Welch, Anthony R. HC441.A8565 2011 330.959–dc22 2011001646 10 20

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Contents List of Map, Tables and Figures

viii

Preface

xi

Acknowledgements

xiv

Notes on Contributors

xv

Chapter 1

Introduction: Structural Changes, Economic Challenges and Political Accommodation: Managing the Rise of China in Southeast Asia Darryl S.L. Jarvis and Anthony Welch

Chapter 2

Rising China, US Influence, and Southeast Asia: Background, Status, and Outlook Robert Sutter

18

Chapter 3

The Dragon, The Tiger Cubs and Higher Education: Competitive and Cooperative China-ASEAN Relations in the GATS Era Anthony Welch

39

Chapter 4

International Financial Centres in Asia: Contest, Competition and Possible Trajectories Darryl S.L. Jarvis

123

Chapter 5

Being Sandwiched: The Reshaping of ASEAN-China Food Trade Niels Fold, Jeff Neilson and Bill Pritchard

180

Chapter 6

Energy Security and Competition in Asia: Challenges and Prospects for China and Southeast Asia Benjamin K. Sovacool and Vu Minh Khuong

210

Chapter 7

The Impact of China on the Electrical and Electronics Industry in Southeast Asia Frank Ben Tipton

230

Chapter 8

Agricultural Biotechnology in China: Prospects for New Economy Industries in Southeast Asia Fredoun Ahmadi-Esfahani

265

Index

1

294 vii

List of Map, Tables and Figures Map 1.1

Southeast Asia

5

Tables 3.1a and 3.1b ASEAN-China trade growth, 1991–2006 3.2 Export earnings from international students (higher education), selected major providers, 1989–2008, and percentage of total national service sector trade 3.3 Modes of provision of cross-border educational services 3.4 International students in OECD countries, by number and percent, 1999 and 2006 3.5 English-speaking countries’ share of international students, by origin, 1995 and 1999 (%) 3.6 Destinations of students from Asia-Oceania, 1995 and 1999, by percent 3.7 Size and role of overseas Chinese in ASEAN Three economies, 1990s 3.8 ASEAN Three + China – Economic and educational indicators 3.9 Singapore’s sites of foreign direct investment, 1997–2007, in SG$ millions 3.10 Number of public HEIs and enrolments, 1990–2006 3.11 Changes in staff-student ratios, Chinese universities, 1985–2006 3.12 Chinese students studying abroad, by category, 1997–2000 3.13 ASEAN students in Chinese universities, 2000–2006 3.14 University scholarships offered by China, 2003–2004, and 2004–2005 3.15 Numbers and destinations of Singaporeans studying overseas, 1981–1990 (self-financed) 3.16a Undergraduate enrolments and graduations, local and external, 1997–2000 3.16b Postgraduate enrolments and graduations, local and external, 1998–2000 viii

41 46 47 48 50 51 55 57 62 66 67 73 74 75 82 84 84

List of Map, Tables and Figures ix

3.17 3.18 3.19 3.20 3.21 3.22 3.23 3.24 3.25 3.26 3.27 4.1 4.2 4.3 4.4 5.1 5.2 5.3 6.1 6.2

7.1 7.2 7.3

Higher education enrolments, degree and diploma, Malaysia, 1970–2008 Undergraduate enrolments in Malaysian public and private HEIs, 1995–2000 Private HEIs in Malaysia, as of May 2001 International enrolments, Malaysian public and private HEIs, 2002–2007 Awards to Chinese students covered by MOUs, to study at Malaysian public universities Viet Nam’s higher education targets, 2001, 2010 and 2020 Higher education enrolments by institution and category, 2000/1 and 2006/7 Enrolments, public semi-public and private HEIs, 1996/7–1998/9 Vietnamese students at Chinese universities, institutional agreements, 1992–1993 to 2003–2004 Chinese students at Vietnamese universities, institutional agreements, 1992–1993 to 2003–2004 China-ASEAN cross-border educational services – a summary Hong Kong financial centre: Banking sector and financial sector composition Evolution of financial services sector in Shanghai: 1990 to 2007 PRC banking system Singapore financial centre: Banking sector and financial sector composition ASEAN food exports to China, major flows, selected years, 1992–2005 (US$ millions) Chinese food exports to ASEAN, major flows, selected years, 1992–2005 (US$ millions) A framework to account for ASEAN-China food trade Selected indicators on China’s energy consumption Level of per capita consumption of electricity for the world average, China and ASEAN-6 countries (US in 2000 = 100) Indicators of conditions of doing business in Southeast Asia, compared to the United States, 2004 Corporate structure in Southeast Asia Indicators of conditions of doing business in Hong Kong and China, compared to United States, 2004

90 91 92 95 97 99 100 100 103 103 105 134 144 147 153 188 189 190 212 216

243 245 246

x List of Map, Tables and Figures

7.4 8.1 8.2 8.3 8.4 8.5

Corporate structure in Hong Kong and China Estimated number of biotechnology-related ventures in Asia China’s plant biotechnology research budget by source in the sampled institutes, 1986–1999 Numbers and composition of plant biotechnology research staff in sampled institutes in China, 1986–1999 Crop biotechnology research and development in selected East Asian countries Number of GM plants approved in China through 1999

247 267 270 271 275 281

Figures 3.1 3.2 5.1 5.2 6.1 6.2 6.3 6.4 6.5 6.6 6.7 6.8

Host countries for international students, 2001 Chinese students studying abroad and returning, 1997–2007 Two-way food trade between ASEAN and China The influence of palm oil – ASEAN’s food trade balance with China Chinese consumption, production, and reserves of oil, 1981 to 2008 Total energy consumption for seven ASEAN countries, 1990 to 2005 by country ASEAN’s consumption, production, and reserves of oil, 1981 to 2008 Crude oil prices, 1990–2009 Chinese energy-related carbon dioxide emissions, 2005–2030 (million metric tons) Total energy consumption for seven ASEAN countries, 1995–2006 (million tons of oil equivalent, by fuel source) Environmental damages from various electricity sources (in US cents/kWh) Variations among developing Asian countries on energy efficiency and intensity

49 72 188 189 213 214 215 217 219 220 221 222

Preface The “rise of China” is by now a well worn phrase known the world over. Few doubt the momentous changes that China’s entry onto the world stage has wrought. From dramatically changing trade patterns to the growth of global financial imbalances, China’s explosive growth has been the story of the late twentieth and early twenty-first century, transforming international economic and political relations in ways that few scholars could have predicted a mere two decades ago. With hindsight, we should perhaps not be surprised by this. Both China and India have historically accounted for a far greater proportion of global economic activity than their most recent pasts betray. As far back as the 1870s China had a significant presence in the global economy accounting for as much as 17.1% of global GDP and India for 12.1% (Maddison, 2003). The “rise” of China thus represents a return to an historical norm rather than an aberration; indeed the aberration being its near disappearance from the global economy between 1949 and the early 1970s. In historical terms it is thus the rapidity of China’s growth rather than the size of its economy that is most remarkable. As the Economist magazine reported recently, “In China each person now produces four times as much as in the early 1970s” with as many as 400 million people being lifted from abject poverty into the ranks of an urban dwelling middle class in the space of a single generation (Economist, 2007). Not before has the world witnessed such a rapid transformation. While the historical debate about China’s growth and (re)emergence will occupy historians for centuries to come, it is the impact such developments are wreaking on the global political-economy and, importantly, on Asia itself which rightly attracts current attention. In the West this has manifested as a consuming preoccupation with debates about the decline of the West or the displacement of American hegemony and the implications for global order. In the East, in contrast, these debates have been much less noisy and subsumed amid the practical problems of managing and accommodating China. Indeed, while the West has been busy contemplating the coming new age, in the East they have started to live it. The changes are visceral. In Southeast Asia and ASEAN (The Association of Southeast Asian Nations) strategic landscapes, the projection of US power, and the security guarantees extended through xi

xii Preface

carefully crafted US-Asian bilateral relationships, are all experiencing increasing flux as the pull and push of China’s security and economic power fundamentally impacts the region. More immediately, the threat posed by China to those traditional growth engines that have been responsible for ASEAN’s own “economic miracle” has created stresses requiring rapid re-engineering. The rise of China has thus been greeted with mixed feelings in Southeast Asia; celebrated as evidence of the emergence of the “Pacific century” but also met with concern and trepidation about the implications for economies and ways of life. Contradictory tensions in Southeast Asia’s economic and political relationships thus appear to be the order of the day. Yet the precise dimensions of these implications are not well appreciated or researched. Aggregate accounts of China’s rise and the sheer size of its economy seem popularly to be interpreted as a kind of market “crowding out” phenomenon, with ASEAN and Southeast Asia coming off second best. Indeed, the “pull” effects of the Chinese economy have been variously greeted as marking the end of Southeast Asia’s miracle economies, with foreign direct investment (FDI) heading towards the eastern coastal seaboard of China in search of cheaper cost havens to make and assemble its wares. As the contributions to this volume have discovered, however, this is only part of the story – albeit an important part. China’s rise does indeed represent challenges for ASEAN and Southeast Asia but also increasing opportunities, many of which are only now becoming apparent. Appreciating the contours of these challenges and the opportunities they represent for ASEAN and Southeast Asia is the principle concern of the contributions to this volume. They do so, however, not through a generic lens focused on China per se, but a series of micro-studies focused on discrete industry sectors in Southeast Asia in order to map the impact, consequences and likely trends that China’s rise poses for these sectors. Only in the context of empirically informed research might we then begin to put together the myriad consequences that China’s rise poses for ASEAN. Our volume is, of course, an incomplete one and given the rapidity of change in the region a mere snapshot of selected industry sectors and their current experiences. However, we hope the narratives and conclusions each of the contributors provides go some way to informing debate and help observers better understand the evolving changes sweeping Southeast Asia. Darryl S.L. Jarvis and Anthony Welch

Preface xiii

References Angus Maddison (2003) The World Economy. Historical Statistics, OCDE, Paris. “Rich Man, Poor Man”, The Economist, January 20–26, 2007, p. 11.

Acknowledgements Research for this project originally commenced through the commission of the Research Institute for Asia and the Pacific (RIAP) at the University of Sydney, Australia, and through research funding generously provided by the Ministry of Finance, Overseas Bureau, Japan, in support of the project “Building Institutional Capacity in Asia” (BICA). The editors and authors gratefully acknowledge the support of RIAP and the Ministry of Finance, Japan. In particular, the editors would like to thank Leslie Williams for his support and logistical input into the early research phase of the project and Dr Stephanie Fahey, previously Director of RIAP, for her mentorship. Subsequent research support was provided by the Lee Kuan Yew School of Public Policy, National University of Singapore (NUS), the Research Institute for Higher Education, University of Hiroshima, and the Fulbright Commission. Financial support provided by the NUS Staff Research Support Scheme generously supported preparation of the manuscript. The Editors also gratefully acknowledge the editorial assistance, copy-editing and research support provided by Kelly Sovacool and Lin Hui, both Research Fellows at the Lee Kuan Yew School of Public Policy. Finally, we would like to thank each of the authors for their patience and diligence in the preparation of their contributions. Darryl S.L. Jarvis and Anthony Welch

xiv

Notes on Contributors

Anthony Welch, co-editor of this volume, is Professor in the Faculty of Education and Social Work, University of Sydney. A policy specialist, his more than 100 publications include studies of reforms and policy issues, principally within Australia and Asia. Professor Welch has consulted to international agencies, governments in Australia, Asia, as well as within Europe, and to US institutions; and he has project experience in several parts of Asia, particularly in the area of higher education reforms. His work has been translated into eight languages, and he has been Visiting Professor in the USA, UK, Germany, France and Japan. A Fulbright New Century Scholar (2007–2008), his most recent books are The Professoriate: Profile of a Profession (2005) and Education, Change and Society (2007, 2nd Edition) and Higher Education in Southeast Asia: Changing Balance, Blurring Borders (2011), that examines the shifting balance of public and private higher education, and associated issues such as finance, equity, transparency and regulation. Darryl S.L. Jarvis, co-editor of this volume, is Associate Professor in Lee Kuan Yew School of Public Policy, National University of Singapore. His research and teaching interests focus on international and political risk, and the political economy of investment into Asia. Prior to joining NUS he was Senior Lecturer in the Faculty of Economics and Business at University of Sydney. He is currently the recipient of a large multi-year grant investigating the role of regulatory risk in five of Asia’s leading economies; China, India, Thailand, the Philippines and Indonesia. His recent publications include, Jarvis, Darryl S.L., Ed Araral, M. Ramesh & Wu Xun (2010) (eds), Infrastructure Regulation: What Works, Why, and How do We Know? Lessons from Asia and Beyond (2010), Handbook of International Business Risk: The Asia Pacific (2003), International Relations and the Challenge of Postmodernism: Defending the Discipline (2000), International Relations. Still an American Social Science? Toward Diversity in International Thought (2001), and Post-modernism and Its Critics: International Relations and the Third Debate (2002). He has also contributed articles to Regulation & Governance, Journal of International Relations and Development, Politics and Society, Asian Survey, Policy, Organization & Society, Global Society, Journal of Interdisciplinary International xv

xvi Notes on Contributors

Relations, The Australian Journal of International Affairs, as well as authored a series of invited papers. Fredoun Ahmadi-Esfahani is currently an Honorary Associate Professor in Agricultural Economics at the University of Sydney. He has served as Leader of the Discipline of Agricultural and Resource Economics and Associate Dean of the Faculty of Agriculture at Sydney, and held visiting positions at the Harvard Business School and Stanford University. His research interests include food policy in China and Australian food exports to East Asia. He has published over 80 articles on a wide variety of applied economic issues in more than 15 international journals and a significant number of other scholarly outlets, including “Is Regulation of Biotechnology Economically Justified?”, Asia Pacific Journal of Environmental Law, 8 (3 & 4), December 2004. Niels Fold is Professor in the Department of Geography and Geology, University of Copenhagen, Denmark. His research focuses on the dynamics of global agro-industrial chains relating to perennial crops in developing countries. Jeff Neilson is a Research Fellow in School of Geosciences at the University of Sydney, Australia. His research focuses on the geography of tropical agriculture and commodity trade. His current research is concerned with India and Indonesia and addresses the relationship between local institutional settings and global markets, and the implications of this relationship for poverty reduction. Bill Pritchard is Associate Professor of Geography in the School of Geosciences at the University of Sydney, Australia. His research focuses on the geographies of global change in agriculture, food and rural places and the ways that the emerging global economy in food and agriculture is transforming places, industries and people’s lives. Dr Pritchard is author of two books and has published 43 refereed articles and book chapters. He is an active member and former convenor of the Agri-Food Research Network, and a member of the Australian Research Council Research Network on Spatially Integrated Social Sciences. Benjamin K. Sovacool is an Assistant Professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is also a Research Fellow in the Energy Governance Program at the Centre on Asia and Globalisation. Dr Sovacool has worked as a researcher, pro-

Notes on Contributors xvii

fessor, and consultant on issues pertaining to energy policy, the environment, and science and technology policy. He has published more than 80 academic articles and presented at more than 30 international conferences and symposia. He has worked in advisory and research capacities at the US National Science Foundation’s Electric Power Networks Efficiency and Security Program, Virginia Tech Consortium on Energy Restructuring, Virginia Centre for Coal and Energy Research, New York State Energy Research and Development Authority, Oak Ridge National Laboratory, Semiconductor Materials and Equipment International, and US Department of Energy’s Climate Change Technology Program. He is the co-editor with Marilyn A. Brown of Energy and American Society: Thirteen Myths (2007) and the author of The Dirty Energy Dilemma: What’s Blocking Clean Power in the United States (2008). He is also a frequent contributor to such journals as Electricity Journal and Energy Policy. Robert Sutter is Visiting Professor of Asian Studies at the School of Foreign Service, Georgetown University. Prior to joining Georgetown he specialised in Asian and Pacific Affairs and US foreign policy in a US government career spanning 33 years involving the Congressional Research Service of the Library of Congress, the Central Intelligence Agency, the Department of State, and the Senate Foreign Relations Committee. He was for many years the Senior Specialist and Director of the Foreign Affairs and National Defense Division of the Congressional Research Service. He has also served as the National Intelligence Officer for East Asia and the Pacific at the US Government’s National Intelligence Council, and the China Division Director at the Department of State’s Bureau of Intelligence and Research. Professor Sutter holds a PhD in History and East Asian Languages from Harvard University and is the author of 17 books, numerous articles and several hundred government reports dealing with contemporary East Asian and Pacific countries and their relations with the United States. His most recent book is The United States in Asia (2008). Frank Ben Tipton holds a Personal Chair in the Discipline of International Business, Faculty of Economics & Business at the University of Sydney, Australia. He previously held positions at Harvard University, Wesleyan University, Connecticut, and the University of California, Riverside. His research interests are concerned with governance structures and strategic management, and the ongoing impact of information and communication technologies. His most recent book is a comparative

xviii Notes on Contributors

study of firm governance in Asia, set in a historical and institutional context (2007). His most recent research focuses on the intersection of public and private governance structures, and the ways in which state structures and public policy affect business strategy in Asia. Vu Minh Khuong is Assistant Professor at the Lee Kuan Yew School of Public Policy, National University of Singapore. His research interests are in economic growth and competitiveness, the impact of Information and Communication Technology on economic development, and Asian economic integration. His articles have appeared in publications such as Scandinavian Journal of Economics, German Economics Review, and the New Palgrave Dictionary of Economics. Dr Vu has held various positions when working in Viet Nam, including: CEO of Songcam Chemical Company, Vice-Chairman of Dinh Vu Economic Zone, Deputy Chief of Haiphong City Government’s Office, and Associate Fellow at the Prime Minister’s Research Commission. He has also been extensively involved in international development projects as a consultant to the IMF, World Bank, IFC, and USAID and currently serves as the faculty chair for the Viet Nam Program (Asian Development Bank) at the Asia Competitiveness Institute, Lee Kuan Yew School of Public Policy. Dr Vu holds a PhD in Public Policy and an MBA from Harvard University, and a BA in Mathematics from Hanoi National University.

1 Introduction: Structural Changes, Economic Challenges and Political Accommodation: Managing the Rise of China in Southeast Asia Darryl S.L. Jarvis and Anthony Welch

Asia is changing, and China is a principal cause (Shambaugh, 2005) Too often, China-ASEAN relations are seen through the narrow prism of trade. The figures are impressive enough, of course – total trade reached US$202.5 billion in 2007, an increase of nearly 30% over the previous year. Of this, China’s exports to ASEAN comprised US$94.2 billion, while ASEAN exports to China totalled US$108.4 billion (Leese, 2009: 930). The ratification of the China ASEAN Free Trade Agreement in 2002, followed by agreements to reduce tariffs on around 7,000 traded goods in 2005, and services in 2007, is only the latest chapter in a developing regional trade relationship that, however challenging, is proving valuable to both sides. China’s economic growth, previously seen as a threat, is now more often seen as an opportunity by the countries of Southeast Asia. Notwithstanding the impact of the Global Financial Crisis of 2008–10, further strong growth will result from the planned implementation of a zero tariff regime between China and six old ASEAN member countries – Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand – (for most goods) by 2010, and between China and the other four new ASEAN members – Cambodia, Laos, Myanmar and Viet Nam – by 2015. By 2010, the China-ASEAN free trade area will embrace a regional population of 1.8 billion and a combined GDP of two trillion US dollars, making it the third largest market in the world after the European Union and the North American free trade area. While the pattern of trade has historically been characterised by ASEAN economies acting as suppliers of parts or resources to China for assembly 1

2 Introduction

or production and export to the West, trade relations are increasingly diverse, as this book reveals. By 2006, for example, China and ASEAN were each other’s fourth largest trading partners, and according to Chai Yu of the Asia Pacific Institute of the Chinese Academy of Social Sciences, the region is witness to a change in forms of trade – “from raw products to finished industrial products, especially mechanical, electrical or high-tech products” (China Daily, Oct. 30th, 2006). By 2005, these categories formed 60% of China ASEAN trade and 45% of ASEAN-China trade. Indeed, the increasing complexity of this two way trade and its ever growing volume (now valued at over US$200 billion dollars), indicates a maturation not just in the formal trade policies and practices between ASEAN and China, but also fundamental transitions in the structure of their economies and the nature of the production systems each are evolving. Where previously, for example, the ASEANChina relationship could be defined principally in terms of the competitive dynamics between the two to produce and supply goods to Western markets, now a more complex series of dynamics and a greater level of economic reciprocity is witnessing the emergence of economic complementarities. Much of this has occurred incrementally and been propelled as much by a restructuring in the value-chains of private sector actors, particularly large multinational enterprises (MNEs), as by the grand designs of political leaders. The mass movement of private sector capital toward China throughout the 1990s, for example, witnessed ASEAN’s share of FDI into Asia decline from 50% in 1990 to approximately 16% in 2009, with China now capturing 50% of all FDI into the region. Greenfield investment into ASEAN in the ECM sector (electronic component manufacturing), in particular, has declined markedly, predominantly as a result of Japanese MNE’s re-orienting their investment strategies out of Singapore, Malaysia, and Indonesia and toward Northeast Asia (China and South Korea). Yet the sense in which this has collapsed investment into ASEAN and created skewed trade patterns between ASEAN and China is probably overstated. While, to be sure, structural changes in Asia have produced genuine concerns about the sustainability of the ASEAN miracle economies and propelled ASEAN leaders to evolve alternative economic growth drivers, the initial fears about being dwarfed by China or simply “under sold” by China’s comparative cost and size advantages have not materialised. If anything, China’s entry into the world economy has created a new economic growth pole for Asia: one that ASEAN is well placed to advantage from. China’s new found prosperity, for example, has become an important source of investment into ASEAN, now reaching

Darryl S.L. Jarvis and Anthony Welch 3

US$1.1 billion by the end of 2005 (from US$150 million in late 1991), while ASEAN’s total investment of US$38.5 billion in China has also grown year on year. These intensifying linkages are remarkable when set against the history of ASEAN-China relations. ASEAN, which dates from 1967, was principally established as a security community: a bulwark against Chinese expansionism and concerns about a “domino effort” as a consequence of the war in Viet Nam. Its inception was thus born of the Cold War and overwhelmingly sponsored by the United States. The evolution of ASEAN-China relations and their flowering into fully-fledged trade agreements thus marks a radical juncture from the inception of the grouping. But history casts a long shadow and it would be incorrect to suggest that these legacies have evaporated entirely. There is still a reserve about China’s regional intentions (Osborne, 2006; Wang, 2005). A recent major survey of elite opinion within the region, for example, strongly expressed the view that in ten years time, China would be the most powerful presence in the region (more than twice as many as indicated America), while also indicating a certain anxiety about what this represented (Whitney and Shambaugh, 2008). While the survey confirmed widespread support for the development of an East Asian Community, with a focus on confidence building and conflict prevention, economic integration, and strengthening good governance and democratic norms, there was also a sense among respondents in Southeast Asia that ASEAN was a useful means of containing larger regional powers. Notwithstanding the coining of the term “China’s Peaceful Rise” (by Zheng, Bijian, at the Boao Forum, in 2003), majority opinion viewed China as the most likely threat to peace and security in Asia over the next decade. We should, perhaps, not be surprised by these results. Asia’s most recent past has been defined by acute security fault lines, with much of Asia separated from China through bilateral and multilateral security treaties and the overreaching security arc of the United States. China, in many senses, has been as much of an anathema to Asia as it has the West, with formal diplomatic relationships only established recently. Thailand, for example, only established diplomatic relations with China in the early 1980s, Singapore, Brunei and Indonesia not until the early 1990s, while Viet Nam fought a war with China as late as 1979. Both China and ASEAN have thus been engaged in a steep learning curve, building political, economic, trade, and financial linkages from the ground up. While trade has served as the principal agent to broker and build relations, it is also evident that China-ASEAN relations are ascending to

4 Introduction

a new plane. China’s provision of a major loan to Thailand and assisting with raising loans for Indonesia in response to the regional financial crisis of 1997–1998, raised its stocks considerably and began its regional charm offensive. A decade later, in the face of an even more severe economic crisis (the Global Financial Crisis of 2008–2010), China’s connections to the region show every sign of deepening. China’s recently announced plans for a China-ASEAN investment cooperation fund totaling US$10 billion, designed for cooperation on infrastructure construction, energy and resources, information and communications, and over the next few years, to offer US$15 billion credit to ASEAN countries, including loans of US$1.7 billion for cooperative projects, signals a more engaged relationship. Indeed, ASEAN appears to be one of the primary beneficiaries of China’s new-found soft power. Recent initiatives to offer 270 million yuan (US$39.7 million) in soft aid to Cambodia, Laos and Myanmar, along with the establishment of the US$5 million China-ASEAN Cooperation Fund, the donation of US$900,000 to the ASEAN plus Three Cooperation Fund, and the provision of over 2,000 scholarships to ASEAN nationals, is indicative of the growing importance Beijing attaches to ASEAN (Cheow, 2004; Vaughn and Morrison, 2006; Whitney and Shambaugh, 2008). This is also reflected in Beijing’s formal political diplomacy toward ASEAN member states. No longer is Beijing overtly critical in its bilateral relations but rather increasingly accommodating, refraining from criticism of domestic policies in an effort to elevate the tone and depth of China-ASEAN relations. China’s formal assent to the ASEAN’s Treaty of Amity and Co-operation in 2003, for example, and Hu Jintao’s visits to Brunei, Indonesia, Viet Nam and the Philippines in 2005, cemented the character of the China-ASEAN relationship, with China stressing its willingness: to strengthen the friendly cooperation of good neighbours with all ASEAN countries … to realise the common development and prosperity and expand the coordination and cooperation in international and regional affairs. China supports ASEAN’s integration course and its leading role in the East Asian cooperation process (Osborne 2006). But geography and history are also powerful influences on relations between China and ASEAN. China, it should be recalled, is bounded on its southern border by several Southeast Asian states: Viet Nam, Burma (Myanmar), and Laos, while also sharing sea borders with all of the Southeast Asian countries, with the exception of Burma (see Map).

Darryl S.L. Jarvis and Anthony Welch 5 Map 1.1

Southeast Asia

CHINA TAIWAN BURMA LAOS

PHILIPPINES

THAILAND CAMBODIA

VIETNAM

BRUNEI

MALAYSIA SINGAPORE

INDONESIA

PAPUA NEW GUINEA

AUSTRALIA

This geography defines equally collective interests but also points of contestation and fissure. Disputes over oil and gas rights, contests over minor territorial sovereignties, and competitive dynamics over access to energy to support development and sustain economic growth, make for a complex tapestry of interests that can serve equally as points of cooperation or conflict. China’s increasing inroads into Burma (Myanmar) with the construction of USD$2.55 billion Myanmar-China oil and gas pipeline (commenced in 2009) under the auspices of PetroChina,

6 Introduction

for example, demonstrate how tentative are forms of cooperation and how geo-strategic interests can easily rival cooperative ambitions. China’s aggressive pursuit of Burmese energy resources leaves little doubt about the lengths to which Sino interests will be protected despite talk of cooperation and trade enhancement. Indeed, recent history is littered with such rivalries. Japan’s dispute with China in the East China Sea over the Shunqiao gas field which lies in the Chinese Exclusive Economic Zone (EEZ) and only four kilometres within the border claimed by Japan, for several years has witnessed increased maritime and air patrols amid growing political acrimony (Fackler, 2004). Similarly, disputes over the Spratly islands witnessed naval clashes between China and the Vietnamese killing 77 Vietnamese naval personnel in 1988, and again resurfacing in March 2004 when China and Viet Nam both reasserted sovereignty over the islands (Vaughn and Morrison, 2006). At the same time, Chinese aggression in seizing the Mischief Reef (part of the Spratly islands) in 1995 marked a low point and continuing irritant in relations with the Philippines. In all these cases ASEAN’s clout has been limited, with the ASEAN Regional Forum playing a modest role in defusing tensions by orchestrating the “Conduct of parties in the South China Sea” signed by ASEAN member states and China in 2002 (Vaughn and Morrison, 2006). The ASEAN-China relationship thus continues to be defined as much by competitive strategic rivalries as by new-found motifs to proclaim cooperation. China’s softly softly approach to ASEAN since the early 2000s, for example, reflects as much its desire to deal with Japan through classic ‘wedge’ diplomacy as it does any innate affinity with ASEAN. China’s historical grievances with Japan, and Japan’s inability to reach political accommodation through a formal apology and public contrition, continues to make for a cumbersome relationship that, at times, has become acrimonious. In part because of this, Beijing views ASEAN as an important counterweight to both help manage its relationship with Japan but also as a means to hem in Japan by usurping Japanese interests in the region. And where China privately harbours fears about head-on economic competition with Japan and the ability of Mainland enterprise to compete effectively against Japanese business interests, trade and investment in ASEAN provides a measured level of assurance to prime Chinese business and enterprise in a grouping that reflects a comparable level of economic development and economic sophistication. For Beijing, ASEAN is thus increasingly seen as both politically useful and economically beneficial to its longer-term interests in the region. What commenced as a security community to protect against the encroaching interests of China is now, ironically, viewed by Beijing

Darryl S.L. Jarvis and Anthony Welch 7

as a means to help secure its interests. In this broad context, ASEANChina relations thus appear bound to grow deeper over the coming years.

Assessing China’s rise: A sectoral approach As the contributions to this volume reveal, however, these broader conclusions belie uneven experiences across various industry sectors. While the geo-strategic and the geo-political ambitions of China and ASEAN’s leadership weigh heavy on the trajectories of future relations, equally these trajectories will be impacted significantly by the economic landscapes that are emerging across industry sectors. China’s rise thus needs to be disaggregated and contextualised in specific domains. Rather than any ubiquitous impact, the story of China’s rise and its implications for Southeast Asia has to be read from multiple landscapes. This volume is a contribution to reading these varied landscapes. It assumes no theoretical lens other than empirical and contextual studies of the industry sectors addressed and how the rise of China articulates in these domains. Each chapter thus attempts to provide a snap shot of the composition of the sector and the forces propelling change within it. But in constructing each of the chapters and mapping the contours of the sector concerned, authors have had to manage a series of analytical problems. First, states in Southeast Asia are inherently dissimilar. Levels of economic development, rates of economic growth, government and institutional capacity, and industry policy and implementation practices vary so enormously that any mapping exercise attempting to get a handle on the state of play in a sector across so many countries is necessarily constrained. Contributors have dealt with this issue in various ways. Some, for example, have concentrated on those states whose footprint is the greatest and who demonstrate leadership in the sector. Others have focused on emergent trends as a means of plotting the changing landscape even though such trends have yet to fully materialise. Second, disentangling the impact of China from the normal multifarious economic forces that operate on each domain makes any analysis a necessarily messy affair. Contributors to this volume have grappled with these issues in different ways, and, invariably, have each reached different conclusions. Rather than a weakness of the volume, however, we think this one of its strengths. What emerges is a series of dissimilar narratives about the rise of China, the impact this is having across Southeast Asia, but told predominantly through specific domain analyses that attempt to map and understand

8 Introduction

the historical emergence of the sector, its trends, and the broader forces shaping its future. Not surprisingly, the overwhelming conclusion of this volume is that there are both winners and losers across the region, disadvantages and benefits that suggest a much more complicated series of developments than first supposed. For Asian policymakers, this book thus confirms what they are beginning to realise: as much as the rise of China has occasioned some economic dislocation in traditional export markets, China’s rise equally presents new opportunities but not without a series of new and confronting challenges.

Organisation of the volume In order to contextualise the rise of China and its significance for a region as wide and varied as Southeast Asia, the volume begins by looking at the seismic shift occurring in the power configuration between the great powers. For decades, the security blanket of the United States and a bifurcated world order under the Cold War provided both the security apparatus in which emergent regimes in Southeast Asia took hold but, more importantly, the economic vortex around which growth and the miracle economies of Asia were conceived. Japan, South Korea, Taiwan, and Hong Kong were all products of this era where economic and security interests were aligned. Subsequently, the emergence of Singapore, Malaysia, Thailand, and increasing levels of economic development in Indonesia, were likewise a product of an era where export-orientated development focused on servicing Western markets and where FDI flowed freely into Southeast Asia from essentially Western economies. As Robert Sutter observes, such a coincidence of interests made for an unparalleled period of growth and increasing prosperity, in essence sidelining Chinese influence. The predominance of the US in this epoch is, perhaps, an anomaly in historical terms but nonetheless created economic dynamics that provided the impetus to growth and a regional security regime. As Sutter observes, however, this American dominated security complex is now breaking down, with states in Asia having to construct new relationships and re-orient their economic and strategic interests. Sutter’s contribution thus helps set the scene for this volume by outlining the geo-political and geo-strategic transformation now occurring in the region, the obstacles and challenges presented in a changing security order and the implications this harbours both for China and the rest of Asia. As Sutter acknowledges, the dimensions of China’s new-found influence in Asia are far from uniform and still evolving. Much of Sutter’s

Darryl S.L. Jarvis and Anthony Welch 9

contribution thus attempts to assess where this influence is being peddled and what forms it is taking – indeed whether this will be successful. The second contribution by Anthony Welch begins a series of chapters focused on specific sectoral domains. Appropriately, the volume begins its domain specific focus with an analysis of higher education and educational services. More than in any sector, higher education and the changing dimensions of the sector betray the vibrant level of economic activity occurring in the region. Asia is a quick learner and governments of all persuasions see higher education as a tool for economic development. Moving up the value chain, transitioning from rural to urban society, and sustaining growth so that its benefits are more evenly distributed, is largely a function of the development of educational capacity. Indeed, throughout Asia the emphasis placed on educational attainment and the ends to which families will go to secure access to education for their children, speaks to an ingrained cultural disposition that not only values education as a social good but which sees education as one of the prime vehicles for social mobility. In Singapore, China, Hong Kong, Japan, and South Korea, the individual and national benefits of investment into higher education have been evident for the last number of decades. Singapore, China, South Korea and Japan all now have universities ranked in the top 100 universities in the world, at least on the THES (Academic Ranking of World Universities ) league table, if not on China’s own Shanghai Jiaotong list. This is no accident. Deliberative state policy and investment provisions have witnessed enormous year on year growth in both the hard and soft infrastructure that constitutes higher education. The gap that has historically divided the East from the West and seen mass enrolments of Asian students in Western academic institutions may be on the verge of abating. China and Singapore, in particular, are investing massively in their educational sectors, attracting international faculty, and have in place sophisticated research funding systems all designed to generate internationally recognised research output. At the same time, the provision of higher education to an increasing proportion of local students, is witnessing the emergence of an educational revolution with ever growing numbers of Asian students enjoying access to quality local services. While, of course, these trends vary among the region, Welch’s contribution captures how dynamic is this transformation. Evidence for this is presented through a detailed analysis of state expenditures on higher education, and the emergence of trade in educational services, with China and Singapore leading the way. As Welch observes, the rapid

10 Introduction

emergence of the Chinese higher education sector holds the prospects for the cross-border delivery of higher educational services among neighbours with cultural and linguistic affinities, and has the potential to impact higher education sectors throughout Asia. But as Welch also observes, not all neighbours are culturally or linguistically similar, and the vast diversity among ASEAN member states in terms of educational attainment levels, investment, and quality suggests that students will be motivated to move around the region and beyond in search of quality educational services. This supposes an increasing space for trade in educational services and for the sector generally, with China’s footprint in the sector likely to become dominant if only because of the sheer size of its population. In Chapter 4, Darryl Jarvis turns to address the rise of Asia’s financial centres. The changing nature of Asia’s economic landscape is perhaps most dramatically felt in the flows of fast moving money sweeping between Asian capitals. From the mid-1960s to the early 1990s, Japan dominated Asia’s financial landscape, controlling upwards of 23% of global financial assets – the second largest in the world behind the United States. In more recent years, however, Japan’s importance has diminished. While remaining the third largest financial market in the world after the United States and the Eurozone economies, its relative importance in Asia is in virtual free fall. By 2007 Japan’s share of global financial assets had declined to just 12% while its financial market assets of US$19.5 trillion are now almost equaled in the rest of Asia at US$18.8 trillion dollars (Farrell et al., 2008: 13, 21). Similarly, between 1990 and 2006 the intensity and depth of Japan’s financial connections to the region and the rest of the world stagnated while the rest of Asia enjoyed deepening financial linkages. Singapore, Hong Kong and Taiwan, for example, ‘now have larger cross-border investments with China and other emerging economies than does Japan,’ and where Tokyo managed to attract just four overseas listings on its stock exchange between 2004 and 2007, Singapore by contrast attracted 40 (Farrell et al., 2008: 62; Tucker, 2007). As Farrell observes, while Asia has enjoyed increasing financial linkages, Japan has essentially been ‘shut out of Asia’s financial integration – in part reflecting the fact that Tokyo’s financial might is almost entirely domestically focused; its debt markets driven by government securities and its equity markets semi-protected by onerous regulatory measures (Farrell et al., 2008; see also Kawai, 2008). Equally, these winds of financial change are occurring in China. While historically Shanghai served as one of the great metropolises of the early twentieth century, the destruction of its financial architecture

Darryl S.L. Jarvis and Anthony Welch 11

from the late 1930s onwards witnessed the assent of Tokyo, Hong Kong, and Singapore. With the rise of China, Shanghai would again appear poised to become a seat of finance and one of the great commercial centres of the world. Yet, as Jarvis argues, this assumption may prove problematic. China’s economic ascendancy has been visceral, but the institutional architecture necessary to support a financial centre remains relatively porous. Financial clustering is a product of various forces. As much as formal design, financial centres are also a product of the soft institutional apparatus that supports entrepreneurship, the regulatory systems that order behaviour, and the effectiveness and efficiency of these systems. China, Jarvis argues, is a long way from achieving the types of institutional and regulatory apparatus that will allow Shanghai to emerge as the region’s pre-eminent financial centre. Rather, competition from centres like Hong Kong and Singapore is likely to dominate Asia’s financial landscape for some decades to come. Despite China’s rise, its ability to project financial power as perhaps might be expected, thus remains constrained. In Chapter 5, Niels Fold, Jeff Neilson and Bill Pritchard turn to analyse the food sector and food trade between China and ASEAN. Agriculture remains the life blood for large swaths of Southeast Asia’s and China’s population. For hundreds of millions of rural dwellers, it provides work and sustenance. As Ford, Neilson and Pritchard note, “perhaps nowhere in the world has the ‘China question’ loomed larger than in ASEAN countries, given Southeast Asia’s sizeable agriculture-dependent population and the vital role played by agri-food sectors to ASEAN countries’ export earnings”. While trade in agri-food is of course prone to national sentiment the world over, in ASEAN the sector’s role as a safety net undergirding the livelihoods of millions makes for a particularly vexed set of interests and protectionist sentiment. Thus, despite China and ASEAN embracing closer trade ties and attempting to enhance their agri-food sectors through freer trade, in ASEAN farmers remain suspicious of being swamped by cheap Chinese fruits, vegetables and semi-processed food products. Indeed, China’s capacity to produce massive volumes of differentiated products at low cost, as Ford, Neilson and Pritchard note, threatens to devastate ASEAN’s agri-food industries and, in the longer term, create food import dependency across Southeast Asia. ASEAN, it would appear, is positioned in an increasingly problematic way within the global food chain. This pessimistic picture needs to be qualified, however. While ASEAN agricultural producers are being marginalised by subsidised production in Northern economies of fruits, vegetables, and seafood, in products

12 Introduction

such as palm oil, coffee, and cassava, ASEAN producers still maintain a competitive advantage. The problem for ASEAN, however, is that these products are characterised by long-term declining terms of trade and suffer from relatively narrow opportunities for value addition because of their subservient positions in the global value chains. While, then, palm oil and the increasing millions of acres now devoted to its production has managed to provide livelihoods to tens of millions of agricultural workers in Southeast Asia (especially Malaysia and Indonesia), the longer-term prospects of the sector appear marginal. For Ford, Neilson and Pritchard, the key point is that the rise of China is providing more threats than blessings to the ASEAN agri-food sector. Despite ASEAN maintaining a trade surplus in food with China, the vast majority of this is contributed by just one product – palm oil. For Southeast Asia, managing the rise of China in ways that does not generate a future dependency on food imports, remains problematic. Much like the rest of the world, Southeast Asia is still grappling with the fundamental transition occurring in the agri-food value chain. In Chapter 6, Benjamin Sovacool and Vu Minh Khuong turn to the energy sector. Energy competition in Asia is intensifying. Where China used to be a net energy exporter it is now a net energy importer. As have gone the winds of economic change in China and Asia, so energy has become an increasingly precious commodity and vital to the region’s continued growth. For this reason, an understanding of the energy security dilemmas faced by China and ASEAN is essential. As Sovacool and Vu Minh point out, energy demand in Asia is expected to grow rapidly in the next several decades. Estimates by the International Energy Agency, for example, anticipate that global demand for energy will double by 2040, but that more than half of this increase in demand will come from Asia, with fully 45% of growth in demand from Asia coming from China alone. By 2030, Asia will have to invest more than US$13 trillion in energy infrastructure if this demand is to be met. This veracious appetite for energy, however, is occurring in a relative institutional and regulatory vacuum. Unlike most other sectors, energy does not enjoy a region-wide coordination mechanism. Regional forums, agreements, energy sharing, or platforms to coordinate and create regionwide energy grids, remain problematic. Indeed, as Sovacool and Vu Minh point out, while China and ASEAN talk about “regionalism” and “cooperation” on energy issues, by and large such talk appears designed to mask opportunistic and protectionist thinking. Rather, energy competition is witnessing a race for energy sources. China, for example, is scrambling to procure energy supplies from as many sources as possible,

Darryl S.L. Jarvis and Anthony Welch 13

while Southeast Asian leaders remain suspicious of each other and distrustful of Chinese plans for expansion. As previously noted, such intense competition for scarce energy resources is witness to various contested sovereignty claims, aggravating the prospects for regional cooperation or of region-wide collaborative efforts to enhance energy security. Perhaps more obviously, however, the institutional contexts within which national energy planning are realised, leaves little prospects for optimism. Poor levels of institutional capacity, institutional inefficiencies, and poor oversight and accountability mechanisms, among others, are not allowing issues of energy efficiency, energy subsidies, energy substitution, access to energy, and environmental emissions to be addressed in ways that will bring about region-wide changes. Pessimistically, Sovacool and Vu Minh suggest that these dynamics may well worsen sector outcomes, creating greater disparities, regional political chasms and environmental outcomes. The rise of China, and with it the demand for energy resources, thus poses unique and likely enduring challenges for ASEAN and Asia as a whole. As the cost of energy increases, the implications for the region’s poor as well as resource poor countries will only become more acute. Finding ways to accommodate these competing interests thus remains one of Asia’s greatest challenges. In Chapter 7, Frank Tipton addresses the impact of China’s rise on the electrical and electronics industry in Southeast Asia. Southeast Asia’s miracle economies were, in large measure, built off the back of Greenfield investments into electronic components manufacturing. From the late 1960s onwards, Japanese investment into Southeast Asia rose year on year, much of it destined for Singapore, Malaysia and Thailand, and in Northeast Asia into South Korea, Hong Kong, and Taiwan. Each enjoyed a veritable explosion in components manufacture and assembly, with nearly all the product destined for western markets. As Tipton points out, this wave of investment into the region created employment opportunities, bolstered export earnings, and provided venture capital that in many instances marked the first wave of export-orientated entrepreneurialism. In Singapore, Hong Kong, and Taiwan, vast fortunes were struck off the back of this change in the global value chain of electrical component manufacture and assembly. Jump ahead to the 2000s and this picture is vastly different. China’s rise has, quite literally, meant the addition of hundreds of millions of low cost workers. Global value chains have been re-oriented, multinational corporations throughout the 1990s moved increasingly into China and out of Southeast Asia, while Southeast Asia was forced to

14 Introduction

rationalise and consolidate its exposure to the sector. As Tipton notes, however, this picture is itself becoming outdated. The nature of the industry is increasingly disaggregated, with component parts crossing borders at increasing intervals. Semi-conductors, for example, historically one of the mainstays of Southeast Asian economies, cross borders usually ten times before reaching the customer (Chan, 2010). The fluidity of the sector and the need for economies of scale in an industry that operates on the knife’s edge in terms of margins, thus presents all manner of competitive dynamics for both Southeast Asian economies and China. Tipton analyses these dynamics through a series of case studies, focusing on firms in Malaysia, China, and Singapore. Unlike other sectors, Tipton characterises the sector as one still dominated by extraregional competition, with both Southeast Asia and China plagued by the problem of market entry barriers and brand development. For Tipton, this presents opportunities for productive collaboration between China and ASEAN, especially in terms of trade agreements and trade corridors, increasing the potential for Asian companies to compete on a global stage. As Tipton also highlights, however, China and Southeast Asia still face a series of structural constraints in the development of the sector. Much of Asia still tends not to be an originator of ICT products or concepts. The “creative quota” still tends to be externally generated (with some notable exceptions), leaving both Southeast Asia and China with the problem of how to move up the value chain and capture the economic rewards of technological innovation. Unlike other chapters in this volume, Tipton’s analysis speaks to a series of problems that equally confront Southeast Asia and China, creating mutual interests and potential synergies for region-wide cooperation. China’s rise, in fact, might be a catalyst to realise these mutual interests and act on them. Finally, in Chapter 8, Fredoun Ahmadi-Esfahani addresses the agricultural biotechnology sector, the rise of the sector in China and the implications for Southeast Asia. Ahmadi-Esfahani suggests that the rise of the agricultural biotechnology sector in China has to be understood in an historical context. A long and at times torturous history of food shortages, famines, concerns over food security, and food privation among a massive rural peasantry, has ingrained in the Chinese psyche a desire to increase agricultural productivity and enhance food security. Indeed, these same precepts apply equally across Southeast Asia, where productivity in the agricultural sector has remained relatively low, a function of low capital intensity and lack of innovation in the methods of

Darryl S.L. Jarvis and Anthony Welch 15

cultivation. Agricultural biotechnology has thus been embraced as a possible medium to enhance sector productivity and sector returns. Unlike Europe where biotechnology applications in agricultural have often been greeted with suspicion or outright consumer hostility, attitudes in Asia have generally been more sanguine, if not positive, toward bio-engineering of food and food products. Not surprisingly, the sector has thus witnessed large increases year on year into research and development activities, the rapid development and cultivation of research capacity, and state promotion of the sector through subsidies. In Malaysia, Taiwan, Thailand, Viet Nam, and China the sector has thus been emerging relatively quickly, in part seen as a means of increasing returns to rural populations, in part meeting the growing food requirements of a still expanding population base and warding off dependency on food imports. Despite these efforts, however, the outcomes vary between countries. As Ahmadi-Esfahani notes, the agri-biotechnology sector in Asia “reveals not so much an integrated sector as a series of discrete sectors whose prospects and fortunes are as varied as the region.” Varying levels of capacity, not just in funding but importantly in the ability of countries in Southeast Asia to develop and retain sufficient knowledge capacity, is not leading to a level playing field but increasing disparities in the sector. In turn, the latitude for complementarities to emerge as these differences become more pronounced will likely diminish. As Ahmadi-Esfahani further notes, there is little evidence of regional coordination in the regulatory architecture that governs the sector. Lack of region-wide standardisation, codification, food labelling, safety and test protocols for bioengineered foods, for example, limits the prospects for trade in the sector or for regional consolidation. All these pose substantial hurdles for the emergence of a pan-Asian agri-biotechnology sector. In this context, Ahmadi-Esfahani suggests that the sheer size of the Chinese agri-biotechnology sector will increasingly come to dominate the sector, drawing in investment, knowledge capacity and making it a global leader in agri-biotechnology innovation. For Southeast Asia, the parameters of this looming competition are thus challenging. The lessons of this volume, then, are far from uniform in their conclusions about the rise of China and the implications for Southeast Asia. Rather, as each of the sectoral analyses demonstrate, China’s rise is neither an overwhelmingly positive development nor a negative one, but producing multifarious outcomes. Perhaps more importantly, the lesson of this volume is how malleable is China’s impact on ASEAN

16 Introduction

industries; much of it contingent on how ASEAN member states themselves engage with China and how they evolve and implement industrial and industry sector strategies to capture the evolving trends and market opportunities. Far from a linear and unidirectional relationship as some might have expected because of China’s often stated economic size, ASEAN is actually well placed to mould this in ways that can potentially serve ASEAN’s interests. The key, however, lies in the degree to which ASEAN is able to coordinate national policies and evolve a regional strategy to leverage off China’s new found interest in the region (see Jarvis, 2009). The coming decades are thus likely to be all-important for ASEAN and will potentially cement its longer-term relations with China. What the final contours of this relationship will be, of course, remains to be written.

References Chan, R. (2010) “Faster Customs Clarence for ‘Low Risk’ Firms”, The Straits Times, 26 June. Chang, S-D. (2008) “The Distribution and Occupations of Overseas Chinese”, Reid, A. (ed.) The Chinese Diaspora in the Pacific, pp. 33–51. Aldershot: Ashgate. Cheow, T-C. (2004) “China’s Rising Soft Power in Southeast Asia”, PacNet 19a, 3 May 2004. China Daily (2006) “China ASEAN Trade Expected to Reach 200 bn USD by 2008”, 30 October. Creaders.net! (2009) “China to Give Aid to ASEAN Countries”, 13 April. Fackler, M. (2004) “Japan will Face Off with China”, Wall Street Journal, 21 October. Gill, B., Green, M., Tsuji, K. and Watts, W. (2009) Strategic Views on Asian Regionalism: Results and Analysis. Centre for Strategic and International Studies. www.csis. org/japan/asianarchitecture Farrell, D., Susan, L., Christian, F., Raphael, B., Moira, P. and Charles, A. (2008) Mapping Global Capital Markets: Fourth Annual Report, McKinsey Global Institute, McKinsey and Company, available at http://www.mckinsey.com/mgi/publications/ mapping_global/index.asp (12 February 2008). Jarvis, Darryl S.L. (2009) “ASEAN Investment Liberalization: Progress, Regress or Stumbling Bloc?”, in Julien Chaisse and Philippe Gugler (eds) Expansion of Trade and FDI in Asia: Strategic and Policy Challenges, pp. 138–185. Routledge: Routledge Contemporary Asia Series. Kawai, M. (2008) “Evolving Regional Financial Architecture in East Asia”, Research Policy Brief 25. Tokyo: Asian Development Bank Institute. Leese, D. (ed.) (2009) Brill’s Encyclopaedia of China. Brill: Leiden. Osborne, M. (2006) The Paramount Power: China and the Countries of Southeast Asia. Sydney: Lowy Institute for International Policy. Reid, A. (2008) “Introduction”, Reid, A. (ed.) The Chinese Diaspora in the Pacific, pp. xv–xxviii. Aldershot: Ashgate. Shambaugh, D. (ed.) (2005) Power Shift: China and Asia’s New Dynamics. Berkeley: University of California Press.

Darryl S.L. Jarvis and Anthony Welch 17 Sheng, Lijun, (2003) “China-ASEAN Free Trade Area: Origins, Developments and Strategic Motivations”, Working Paper, Institute for Southeast Asian Studies, International Politics and Security Issues Series, Number 1. Suryadinata, L. (2003) “Patterns of Political Participation in Four ASEAN States: A Comparative Study”, Wang, L-C. and Wang, G. (eds) The Chinese Diaspora: Selected Essays (vol. 1), pp. 64–83. Singapore: Eastern Universities Press. Tucker, S. (2007) “Asia Seeks its Centre”, Financial Times, July. Vaughn, B. and Morrison, W. (2006) China-Southeast Asia Relations: Trends, Issues and Implications for the United States. Washington: Congressional Research Service. Wang, G. (2000) The Chinese Overseas. From Earthbound China to the Quest for Autonomy. Cambridge: Harvard University Press. Wang, G. (2005) “China and Southeast Asia: The Context of a New Beginning”, Shambaugh, D. (ed.) Power Shift. China and Asia’s New Dynamics, pp. 187–204. Berkeley: University of California Press. Wang, L-C. and Wang, G. (eds) (2003) The Chinese Diaspora: Selected Essays (vol. 1). Singapore: Eastern Universities Press. Welch, A. (2009a) “Internationalisation of Vietnamese Higher Education. Retrospect and Prospect”, Harman, G., Hayden, M. and Pham, T., Reforming Higher Education In Vietnam: Challenges And Priorities (in press). Amsterdam: Springer. Welch, A. (2009b) Malaysia, Higher Education in Southeast Asia: Blurring Borders, Changing Balance. London: Routledge. Whitney, C. and Shambaugh, D. (2008) Soft Power in Asia: Results of a 2008 Multinational Survey of Public Opinion. Chicago: Chicago Council on Global Affairs, and East Asia Institute. Zheng, Bijian (2003) Boao Forum.

2 Rising China, US Influence, and Southeast Asia: Background, Status, and Outlook Robert Sutter

Introduction In the post-Cold War period, unprecedented Chinese diplomatic and international activism in an ever-widening web of bilateral and multilateral arrangements and organisations and China’s rising economic importance as a focal point of intra-Asian trade led to major advances in Chinese relations with the countries in Southeast Asia. Chinese activism and advances were more important among the Southeast Asian states than in any other area of Chinese foreign policy, with the possible exception of South Korea, where post-Cold War advances in Beijing-Seoul relations also were remarkably strong. They succeeded in putting in the background many of the historical, territorial, economic and other concerns Southeast Asian government officials and others in the region, including such outside powers as the United States and Japan, had over China’s rising power and influence. A variety of specialists and commentators highlighted an emerging shift in influence in Southeast Asia among outside powers, with China emerging as the regional leader, and the United States, Japan, and notably Taiwan losing ground in the face of Chinese advances. Japan had appeared to dominate much of the region economically in the late 1980s as a result of massive flows of Japanese aid and investment to the region, and the accompanying large trade volumes with Southeast Asian countries. The protracted Japanese economic stagnation beginning in the 1990s greatly weakened Japanese ability to follow through with earlier economic commitments, though the flow of aid and investment remained important. By contrast, China’s rapid economic growth posed a major opportunity as well as a challenge for a variety of Southeast Asian entrepreneurs, who in many cases realigned their economic plans in order to 18

Robert Sutter 19

work more closely with China. Taiwan saw its importance as an investor and trading partner with Southeast Asian countries increasingly overshadowed by China’s rise. The Chinese authorities also applied much greater political pressure on Southeast Asian governments to refrain from the past practice of frequent ostensibly informal contacts between Southeast Asian and Taiwan leaders, with the result that Taiwan became politically isolated in the region. The United States often was distracted and preoccupied with other issues during the post-Cold War period. The War on Terrorism after 2001 saw US leaders focus on prodding Southeast Asian leaders to do more in support of US military campaigns and anti-terrorist efforts that were unpopular with local populations and elites. The United States was seen as inattentive to the primary concerns of many Southeast Asian governments that focused on economic development, trade and investment needed for effective nation building and governance. The United States government was also less inclined than China and other outside powers to interact closely with the Association of Southeast Asian Nations (ASEAN), the premier regional organisation, and other regional multilateral organisations that the Southeast Asian leaders saw as important for confidence building among sometimes competing regional and other governments, and as an indication of Southeast Asia’s international importance and prestige. Whether or not China is emerging as the leading power in Southeast Asia has prompted considerable debate among specialists. In contrast to the shifts in influence noted above that are cited by many commentators and specialists as an indication of an emerging China-centred order in Southeast Asia (Shambaugh, 2003; Kang, 2003; Kurlantzick, 2005; Marshall, 2006), this assessment associates with specialists who look closely at the evidence of China’s rising influence and find important limitations as well as strengths (Goh, 2006; Glosny, 2006). The view here also discerns that China’s rise has indeed weakened the relative influence of Japan and especially, Taiwan. However, realities of power and influence in the region have not challenged substantially the continued US leadership position as the preferred security guarantor and a preferred economic partner for most of the governments in Southeast Asia. These governments also are seen to welcome and encourage a continued strong US regional position as they manoeuver to insure their continued independence of action, which they believe could be challenged if China’s rise occurred without concurrent activism in the region by the United States and other outside powers (Sutter, 2005, 2006a).

20 Rising China, US Influence, and Southeast Asia

Evolution of Chinese policy and practice China’s approach to the countries and regional organisations of Southeast Asia has not been uniformly smooth in the post-Cold War period. China’s rising military power and occasional resort to forceful rhetoric or military action concerning regional territorial disputes during the 1990s reminded Southeast Asian leaders of China’s past assertiveness against Southeast Asian governments and produced wariness about China’s intentions. China’s strong public opposition in the latter 1990s to US military alliances and other strategic relations in Asia, including Southeast Asia, also were broadly unwelcomed by governments in Southeast Asia that continued to encourage the United States and other powers to remain active in the region as China’s influence rose. More recently, the Chinese leadership’s emphasis on an accommodating approach stressing mutual benefit focused on peace and development has won widespread support amid China’s rapidly growing economic, political and military interaction with all the members of ASEAN (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar [Burma], the Philippines, Singapore, Thailand, and Viet Nam) and with regional organisations affiliated with ASEAN and other organisations (Womack, 2004; Cheung, 2001; Ba, 2003). Chinese trade with Southeast Asian countries grew in the 1990s at an annual rate double the impressive rate of growth of the Southeast Asian and Chinese economies. This was accompanied by an ever-widening array of high-level official contacts. In 1997, ASEAN and China set up an umbrella organisation, the ASEAN-China Joint Cooperation Committee, to oversee already established ASEAN-Chinese political, economic, security, and science-technology exchanges. Chinese President Jiang Zemin led a delegation to ASEAN’s 30th anniversary celebration and informal summit, and signed the first ASEAN-Chinese joint statement in December 1997 (Zemin, 1997). At the time, both China and ASEAN were preoccupied with efforts to deal with the consequences of the Asian economic crisis. Beijing’s careful responses to the crisis, including its pledges to maintain economic growth, eschew devaluation of the Chinese currency, support IMF rescue efforts, and provide supplementary support of $1 billion to Thailand, were well received in the region. Of course, it was widely known that the first two Chinese measures were mainly for Chinese domestic purposes; and that Chinese support for IMF funding and for Thailand actually cost Beijing little (Xinhua, 1998; Kyodo, 1998). Beijing was generally discreet in reaction to anti-Chinese violence that swept Indonesia in the late 1990s. It was sharply critical of Taiwan’s

Robert Sutter 21

efforts to use offers of economic aid in the wake of the economic crisis to foster high-level government contacts in the region, but the Chinese authorities stopped well short of taking significant retaliatory measures against the Southeast Asian governments involved. The underlying issues in Chinese relations with Southeast Asia in the post-Cold War period remained focused on economic competition for markets and foreign investment, territorial disputes in the South China Sea, and concerns over regional security, especially the implications of China’s military modernisation. Many government officials in ASEAN cooperated with China in the 1990s in promoting “Asian values” as a counterpoint to US-backed efforts to foster greater support for international human rights; but they were also privately concerned about China’s support for and widespread interaction with the repressive regime in Myanmar and also occasionally voiced concerns about the extensive Chinese involvement with the authoritarian Hun Sen regime in Cambodia. ASEAN leaders also continued to support the US-Japan alliance and the US military presence in Asia, despite strong Chinese criticism of these during the 1990s until mid-2001 (Sutter, 2000: 114). The pattern of Chinese involvement in Southeast Asia was consistent with the broad goals and practices of Chinese leaders’ post-Cold War policies throughout China’s rim. Seeking to secure China’s periphery and expand advantageous economic, political and military contacts, Chinese leaders made substantial gains in Southeast Asia. Isolated by the West and Japan after the Tiananmen Incident of 1989, China redoubled efforts to sustain and improve ties with developing neighbouring states and others in the third world (Ba, 2003: 632). It accommodated international pressure leading to a peace settlement in Cambodia in 1991, and in the process shifted Chinese support from the reviled and discredited Khmer Rouge to its former adversary, Cambodian strongman Hun Sen, who had been sharply criticised by China in the past. Later in the decade, the Sino-Cambodia relationship had evolved to the point that Hun Sen’s regime had closer ties with China than any other Southeast Asian state, as Chinese military, economic, and political support appeared both generous and without major conditions. Beijing leaders also solidified China’s position as the main international backer of the military regime that grabbed power in Myanmar after aborted elections in 1988. China provided military equipment, training, and economic and political assistance to the internationally isolated regime (Chanda, 2002; Sutter, 2003). Though many remained suspicious of Chinese intentions in Cambodia, Myanmar, and elsewhere in the region, Southeast Asian governments

22 Rising China, US Influence, and Southeast Asia

generally welcomed markedly increased relations with China, as Chinese economic, political and military power and influence grew in the 1990s. Southeast Asian leaders were positively impressed by Chinese leaders’ more active and accommodating stance to Southeast Asia, evident in the late 1990s and into the next decade. Southeast Asian leaders remained pragmatic in seeking an appropriate balance with other powers in the region (Yee and Storey, 2002; Roy, 2002). US influence in Southeast Asia declined following the withdrawal of US forces from the Philippines in 1992, and episodic and inconsistent US attention to the region followed for several years. The September 11, 2001 terrorist attack on America saw US leaders focus renewed attention on Southeast as a second front in the war on terrorism. Japan had been the dominant outside economic power in Southeast Asia but its position declined in the post-Cold War period as economic weakness sapped Japanese influence in Southeast Asia. The European Union remained interested in the region largely for economic reasons, but this interest fell in tandem with the economic downturn in Southeast Asia caused by the Asian economic crisis of 1997–1998. Russia exerted little influence, though Russian arms were relatively cheap and capable, and therefore attractive to some Southeast Asian buyers. As a power with rising capabilities and ambitions, India grew in prominence and took initiatives regarding Myanmar, Viet Nam, and ASEAN more broadly, and in securing sea lines of communications in Southeast Asia (Roy, 2002: 4). Chinese officials tended to be accommodating and diplomatic in most interactions with Southeast Asia during the post-Cold War period, but they showed a hard edge over territorial disputes with Southeast Asian countries in the early 1990s that worked against improving ASEAN-China relations. Chinese officials at this time also appeared very wary of multilateral discussions on these and related issues, presumably suspicious that these forums would put China at a disadvantage on territorial and other sensitive questions. Chinese military-backed expansion of territorial control in disputed islets in the South China Sea came in tandem with the aggressive Chinese military reaction to the Taiwan president’s visit to the United States in 1995, prompting US military countermeasures that were welcomed by many leaders in Southeast Asia. In 1995, ASEAN showed unusual unity in confronting China diplomatically over its military-backed expansion in disputed areas of the South China Sea, and some in ASEAN, notably Singapore and the Philippines, took steps to solidify security ties with the United States in the perceived uncertain environment caused by China’s expansion (Ba, 2003: 633; Roy, 2002).

Robert Sutter 23

Greater Chinese flexibility on territorial disputes and the management of relations with Southeast Asia was evident by 1997 when Chinese officials employed their “new security concept” (NSC) initially in an ASEAN setting. By this time, Chinese leaders were showing more flexibility in dealing with territorial issues with many neighbours, and were more willing to participate in multilateral forums that focused on these and other regional concerns. Chinese leaders from that time onward were also very active in diplomatic, economic and military contacts to reassure Southeast Asian neighbours and others that the image of the “China Threat” was an illusion. The image had been prominent in Southeast Asia as a result of Chinese assertiveness in the South China Sea and Taiwan up to the mid-1990s, and China’s overall military and economic expansion (Ba, 2003). The shift toward greater moderation in 1997 did not include US policy, however. Chinese moves in Southeast Asia for many years explicitly targeted the United States and US interests. Official Chinese media and comment by Chinese leaders portrayed Chinese initiatives as part of a broader international struggle against the “hegemonism”, “power politics”, and “cold war thinking” of the United States, whose leaders were consistently portrayed as taking initiatives in Southeast Asia and elsewhere along China’s periphery with a design to “contain” and “hold back” the rise of China’s power and influence in this and other world areas. Thus, in Southeast Asia, the moderating effect of China’s new security concept was offset by the strident Chinese opposition to American power, influence and policies. The NSC was often juxtaposed to the US efforts to revitalise the alliance relationship with NATO and Japan, seen by Chinese leaders as evidence of “cold war thinking” adverse to Southeast Asian interests and global peace and development. To many leaders in Southeast Asia, Chinese rhetoric seemed to be calling on them to make a choice between Chinese and US approaches – a choice they were loath to make. The net effect of the Chinese anti-US rhetoric was to complicate and hold back Chinese influence in the area (Finkelstein, 1999; Roy, 2002). Taiwan’s efforts to expand diplomatic and economic influence in the region ran up against repeated and strenuous Chinese complaints and pressure on Southeast Asian governments, though in the 1990s the pressure was not as intense as that applied to the US or Japan over Taiwan. For a decade after Lee Teng-hui initiated his “informal diplomacy” with a visit to Singapore in 1989, Taiwan’s president and other senior leaders travelled informally many times to the region to visit their Southeast Asian counterparts, and some senior Southeast Asian leaders

24 Rising China, US Influence, and Southeast Asia

even ventured to Taiwan. As China became more influential in Southeast Asia, it used that influence to increasingly restrict Southeast Asian interactions with Taiwan officials, as well as to curb Southeast Asian interaction with the Dalai Lama and activities in Southeast Asia by the Chineseoutlawed Falungong movement (Thayer, 2001; Breckon, 2003). Other targets of Chinese pressure in Southeast Asia in the post-Cold War period included Japan. Chinese officials and comment were especially critical of Japanese security cooperation with the United States and its alleged negative impact on Southeast Asia (Funabashi, 2002; Tian, 2002). The sharp shift toward moderation in Chinese policy with the United States during the George W. Bush administration beginning by mid-2001 was clearly evident in China’s approach toward Southeast Asia, as in other areas of China’s foreign policy, once again demonstrating the strong influence China’s relations with the US superpower continued to have on China’s foreign relations. The previous strident Chinese rhetoric and strong diplomatic and other pressures regarding the United States were greatly reduced, much to the satisfaction of Southeast Asian governments that generally did not wish to choose between the United States and China and sought to moderate great power contention seen to work against regional interests (Breckon, 2002). There was also a fall off in Chinese criticism of Japan and its security cooperation with the United States dealing with Southeast Asia. Nonetheless, Chinese policy and behaviour continued to work, albeit much more subtly, to build Chinese influence at the expense of the United States and other powers in Southeast Asia. This was seen in active Chinese efforts to foster an ever-growing variety of Asia-only economic, political, and security forums that took pains to exclude the United States. When a US-backed high-level security forum, inaugurated in Singapore in 2002 and sponsored by the Institute for International and Strategic Studies, proved popular with regional leaders, China sent only low-level functionaries while devoting high-level attention to promoting a new Asia only security dialogue that excluded the United States. Greater Chinese flexibility and willingness to engage in negotiations with the various claimants to South China Sea territories also saw Chinese officials endeavour to use the discussions with ASEAN members about a code of conduct over the disputed claims in the South China Sea as a means to restrict US naval exercises in the area. The multilateral US “Cobra Gold” military exercise saw China conduct its own military exercise in apparent competition. China also manoeuvered in its Free Trade Agreement initiative with ASEAN not

Robert Sutter 25

only to shore up China’s position relative to the United States, but also to place in a negative light trade initiatives from Japan, South Korea, and India, under-girding China’s leading position in the region in this area (Sutter, 2005: 197). Moreover, as Chinese influence in the region grew, Chinese officials were prepared to use their increased leverage firmly and forcefully regarding certain issues. Heading the list was Taiwan. By the start of the new century, Chinese officials were in a position to block almost all visits by Taiwan’s president to Southeast Asia and no head of state or government in Southeast Asia visited Taiwan – a sharp turnabout from the highpoint of Taiwan’s informal diplomacy in the 1990s. It was increasingly difficult for lower ranking Taiwan leaders to travel in the region and meet with Southeast Asian counterparts. Chinese influence also kept the Dalai Lama in general isolation from regional leaders and Chinese leaders went all out to press Southeast Asian governments to work with Chinese authorities against the Falungong movement banned in China in 1999 (Thayer, 2001; Breckon, 2003).

Recent developments and assessing China’s influence in Southeast Asia A highlight in Chinese diplomacy in Southeast Asia over the past year came with the whirl wind of events surrounding the visit of Chinese Prime Minister Wen Jiabao to Malaysia on December 11–15, 2005. Following the 11th ASEAN summit that took place in the Malaysian capital, Kuala Lumpur, Wen participated in the 9th ASEAN plus China meeting, the 9th ASEAN Plus Three (China, Japan, South Korea) meeting, and the inaugural East Asian Summit (EAS) that formally involved leaders of the ASEAN Plus Three along with those from India, Australia, and New Zealand, with Russia’s President Vladimir Putin also participating. Wen held a bilateral summit with his Malaysian counterpart, and had formal meetings with most heads of the visiting delegations with the notable exception of Japanese Prime Minister Junichiro Koizumi. Differences with Japan were behind China’s decision not to hold the meeting of Chinese, Japanese and South Korea leaders that usually accompanies the ASEAN Plus Three summit (Sutter, 2006c). The Chinese government had many reasons to be satisfied with the results of the meetings, but the sessions also illustrated some of the limitations and shortcomings in China’s actual influence in Southeast Asia after many years of growing trade, “win-win” diplomacy, and regional integration. Though not addressed often in formal meetings involving

26 Rising China, US Influence, and Southeast Asia

Chinese and Southeast Asian leaders, recent media and scholarly assessments put some emphasis on the fact that the actual behaviour of Southeast Asian governments shows that China’s rise and regional activism was accompanied by varying degrees of wariness on the part of China’s neighbours. This in combination with keen awareness of salient negative implications of Chinese development for Southeast Asian governments and their people posed serious and continuing obstacles to the emergence of any sort of China-centred order in Southeast Asia. Addressing the ASEAN-China meeting on December 12, Prime Minister Wen put forward initiatives to advance Chinese relations with the premier regional group in Southeast Asia. They involved promises to forge a stronger bond of friendship, to put in place a framework for relations, to build the ASEAN-China Free Trade Agreement, to identify areas of cooperation, and to vigorously promote personnel exchanges. His speech on the same day to the ASEAN Plus Three summit called for accelerating the development and conducting feasibility studies of an East Asia Free Trade Area; expanding the Chiang Mai Initiative and developing a framework for regional financial cooperation; closer cooperation regarding energy use; and greater efforts to manage health emergencies and major natural disasters. Emphasising the positives for Southeast Asia in burgeoning trade relations with China, Wen also stressed that in the past five years China has provided “nearly 3 billion US dollars in economic assistance and concessional credit to ASEAN countries”, and that “of the 10 billion dollars of concessional loans and preferential export buyers credit China would offer to developing countries in the next three years, about one third will be provided to ASEAN countries”. The Chinese leader explicitly disavowed a Chinese leadership role in regional organisations in deference to ASEAN, asserting “ASEAN is the organiser and main driving force for 10+3 cooperation … China will continue to support ASEAN in playing the leading role”. The Chinese prime minister’s remarks at the East Asian Summit on December 14 hailed the inaugural leaders’ meeting, emphasised China’s opposition to a “closed, exclusive” regional grouping, favoured openness to the non-East Asian participants in the meeting, and urged strengthened contacts with “the United States, the European Union, and other countries”. He stressed China’s importance as the world’s third largest trader and Asia’s largest importer, and noted percentage increases in the investment of Chinese companies in Asia. He assured the assembled leaders that China would pursue “peaceful” development, would “never seek domination in East Asia”, and “will not develop at the expense of others”. Official Chinese media echoed these themes, and stressed that the EAS

Robert Sutter 27

and ASEAN Plus Three are expected to coexist and “complement each other”. Prime Minister Wen’s bilateral meetings with participants in the EAS generally were full of positive rhetoric, with the notable exception of Japan. Typical of the positive were Philippine President Arroyo’s remarks upon meeting with Wen on December 11 that Chinese-Philippine relations have entered “a golden period”. By contrast, official Chinese media made clear that the Chinese embargo on interactions with Prime Minister Koizumi remained firm despite the emphasis on affability and regional cooperation at the Malaysian meetings. They even highlighted Wen’s refusal to acknowledge Prime Minister Koizumi’s request to borrow Wen’s pen in order to sign the EAS declaration at a public ceremony on December 14 as a deliberate “snub”. Wen later explained the reasons for China’s stance against Japan at the press conference following the signing ceremony. An editorial in China Daily at the start of the Kuala Lumpur meetings went further, accusing Japan of seeking a “leader” role in Asia that it judged was unwarranted given Tokyo’s lack of “credibility”.

Assessing economic relations Subsequent commentaries in official Chinese media highlighted the positive in assessing developments in China-Southeast Asian economic relations in the previous year. A lengthy assessment in China Daily on January 9, 2006 that evaluated the progress of China-Southeast Asian economic ties in the context of progress toward implementing the ASEAN-China Free Trade Agreement stressed the following highpoints (Sutter, 2006b): • 2005 ASEAN-China trade was valued at over $120 billion. • ASEAN states had a trade surplus with China in 2005 of over $16 billion. • Chinese investment in Southeast Asia “in recent years” has “witnessed an annual average growth rate of 60%”. In 2006, the Chinese government will provide loans of “up to $5 billion” on favourable terms to support Chinese enterprises investment in ASEAN. • The first expressway linking China and ASEAN (a 179-kilometer expressway between Nanning, the capital of Guangxi Province, and Viet Nam) opened at the turn of the year. A large port project in southern China for trade from ASEAN, a major road project linking Yunnan Province with Southeast Asia, as well as three separate

28 Rising China, US Influence, and Southeast Asia

Chinese rail links to Laos, Viet Nam, and other Southeast Asian destinations are being built. Chinese media disclosed that July 2005 marked the first phase of the ASEAN-China Free Trade Agreement (FTA) under which tariffs on 7,000 goods were lowered to 20%. The ASEAN-China FTA is scheduled to be fully implemented in six years, with tariffs further lowered to 12% in 2007, 5% in 2009, and 0% in 2012. Chinese officials saw the FTA giving an important boost in ASEAN-China trade, with the Chinese director of the ASEAN-China Business Council predicting in January 2006 that the level of trade would reach $200 billion by 2010. Separate Chinese commentaries focused on the benefits that countries such as Thailand, Malaysia, the Philippines, and Indonesia derived from economic relations with China over the past year. Chinese officials disclosed that Thailand benefited from the Early Harvest Program in the ASEAN-China Free Trade Agreement, running a surplus of $220 million in trade with China involving fruits and vegetables in 2005. They said that Thailand and China planned to establish soon a China-Thailand “Closer Economic Partnership Agreement (CEPA)”, that was proposed by the Chinese premier to his Thai counterpart during ASEAN-China meetings in Kuala Lumpur in December. The agreement with Thailand will represent the first CEPA with a sovereign country. It follows similar agreements China has enacted with its two special administrative regions of Hong Kong and Macao, offering them more preferential trade and investment terms. Malaysia also is considering a CEPA with China, according to Chinese media. Meanwhile, Chinese media accounts disclosed that the Philippines trade surplus with China continued to grow, reaching $4 billion in a total trade valued at $13 billion in 2004, and that IndonesiaChina trade grew 40% in 2005. Disclosures of some of the limitations in Chinese economic relations with Southeast Asia came from non-Chinese reporting or from closer reading of Chinese material. A report of a three-year investigation of Southeast Asian developments by the Stanley Foundation that was published at the turn of the year concluded that Southeast Asians’ motivations for increased trade with China often were “defensive”, as “they view it as an opportunity to recoup some of the trade and investment the region has lost” to China. This loss of trade and investment was seen to have been exacerbated by the end of textile quotas for WTO members in 2005. The study went on to forecast “significant economic dislocation” in Southeast Asia as a result of closer economic integration with China, citing “early experience” showing that “Chinese goods may overwhelm

Robert Sutter 29

indigenous Southeast Asian markets”, prompting some analysts to forecast that Southeast Asia “could lose as much as $400 billion to China over the next 15 years” (The Stanley Foundation, 2005). A key reason for such gloomy assessments was the marked decline in foreign direct investment (FDI) to Southeast Asia as China continues to receive the lion’s share of FDI going to the developing countries. China received $64 billion of FDI in 2004 and $60 billion in 2005. Though Chinese commentaries point to large percentage increases in Chinese investment in Southeast Asia and planned loans to encourage foreign investment in the area, a close reading of Chinese statements and official commentary shows that the actual amounts of such investment are small and do not come close to offsetting the investment that leaves Southeast Asia for China. Thus, a China Daily report on January 16, 2006 disclosed that while Philippine entrepreneurs in 2004 invested almost $700 million in China, Chinese investment in the Philippines was miniscule, with the total Chinese investment through 2003 amounting to less than $20 million. Such figures were generally consistent with trends in global investment involving China, according to official Chinese figures. The Chinese figures belied frequent non-Chinese media accounts that often grossly exaggerate the amount of Chinese investment going abroad. Thus, Chinese officials disclosed in official Chinese media on January 24, 2006 that while China in 2005 received $60 billion in FDI, “China’s outward direct investment totalled US$6.9 billion in 2005”; the comparable figures for 2004 where China received $64 billion in FDI and China invested $3.6 billion abroad. In an assessment based on official Chinese and other data, a Singapore scholar in 2006 underlined China’s weak investment profile in Southeast Asia. By the end of 2004 accumulated investment by Chinese companies in ASEAN was $1.17 billion (compared with $38.22 billion of ASEAN investment in China). US investment in Southeast Asia stood at $85.4 billion. From 1995 to 2003, Chinese investment in ASEAN comprised 0.29% of total foreign investment in ASEAN, compared with 28.83% for the EU, 16.47% for the United States, and 12.9% for Japan. In 2004, China invested $3 billion in Asia but of that total $2.6 billion went to Hong Kong, while Indonesia received $62 million and Singapore $48 million (Sheng, 2006: 1). For a variety of reasons, China does not provide figures giving a clear and comprehensive depiction of China’s foreign assistance. Chinese officials and official commentary do frequently highlight the importance of Chinese foreign assistance in facilitating good economic relations and

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offsetting difficulties Southeast Asian states may have in adjusting to economic globalisation and particularly China’s economic growth and competitiveness. Typically, official Chinese media disclosed on January 7, 2006 that China granted over the past year $33 million and loaned $800 to support infrastructure projects in Indonesia. Other commentary emphasised that China plays a particularly important role in providing assistance to the poor and politically authoritarian Southeast Asian governments near China: Myanmar, Laos, and Cambodia. Nonetheless, a closer look at Chinese aid to Laos, published in February 2006 by China Development Brief, found that while Chinese aid built prominent projects, the actual amount of Chinese aid going to the aid-dependent country was relatively small (about $200 million from 1988 to 2004). Using Lao government data for 2001–2002, the study showed that Laos received $198 million from donor countries and $130 million from the Asian Development Bank and the World Bank. Japan was the largest individual donor at $100 million while China provided $20 million during that period. China’s low profile relative to Japan, the United States and other aid providers in Southeast Asia is consistent with other data released by the Chinese government. It shows that China’s total foreign aid for 2002 was $602.77 million, for 2003 it was $630.36 million, and for 2004 it was $731.20 million (Saunders, 2006: 14). Since a third of Chinese foreign aid is said to be earmarked for North Korea, and China has made numerous aid pledges in African and Latin American countries in recent years, China seems in no position to compete with Japan, the United States and other international aid providers in Southeast Asia (Sheng, 2006: 2). Limitations in China’s aid to Southeast Asia seemed on display during the China-hosted international donors’ conference in Beijing, January 17–18, 2006 to provide assistance specifically to China and other “high-risk” Asian countries including many of China’s Southeast Asian neighbours, notably Cambodia, Indonesia, Laos, and Viet Nam. The meeting was sponsored by China, the European Union, and the World Bank, and followed a January 12–13 conference in Tokyo hosted by Japan and the World Health Organisation where experts from 22 nations discussed prevention and responses to the epidemic. The Tokyo meeting was attended by specialists from Taiwan but Taiwan delegates were excluded from the Beijing meeting. Official Chinese media seemed very pleased with the results of the Beijing donors’ meeting, which saw pledges of almost $2 billion to assist China and other affected countries. The World Bank and the Asian Development Bank each pledged about $500 million, the United States

Robert Sutter 31

pledged over $300 million, and Japan over $150 million. China presumably will gain a proportional share of this international support, helping to pay for the extensive prevention measures undertaken in the large country. Though hosting the meeting, the Chinese government made little effort to play a leading role as an international donor. It pledged $10 million at the conference, and thereby appeared to assure that the Beijing meeting will provide significant net material aid for China. Such small actual donations from China were consistent with the continued emphasis of Chinese officials as seen in year-end wrap-ups by official Chinese media that China “remains a developing country”, has “tens of millions of poverty-stricken people”, and will “suffer from a low per-capita GDP for a very long time”. As a result, “the Chinese government can only provide assistance within its capability”, according to Chinese officials. Against the background, China Daily on January 19, 2005 reported that China’s actual contribution “in cash and kind” to the 2004 Tsunami disaster was worth $22 million. This small amount contrasted with many reports and estimates in the previous year of much larger Chinese donations to the Tsunami disaster as China endeavoured to keep up with the widespread international support valued at several billions of dollars, provided by Japan and the United States and including pledges of several hundreds of millions of dollars each from such middle powers as Germany, Australia, and even Norway. A closer look at burgeoning Chinese-Southeast Asian trade also shows some limitations on Chinese influence. The trade levels are growing fast but are only now approaching the level of US and Japanese trade with the region. With few exceptions, China’s trade with individual Southeast Asian countries represents only a small percentage of those countries’ foreign trade (Glosny, 2006: 42). The majority of China’s trade with ASEAN is processing trade, where a commodity crosses borders, sometimes several times, before completion. This leads to double counting which inflates ASEAN-China trade figures (some estimates say by 30%). Also, the majority of ASEAN-Chinese trade is conducted by foreign companies. They use intra-industry trade to produce goods for export to other developed parts of Asia, the United States, and the European Union. China plays a role in the processing of these products, but the value added by China and the significance of the Chinese input remain small. Meanwhile, a large portion of ASEAN-China trade – especially China’s trade with Singapore, China’s largest trading partner in Southeast Asia, is entrepot trade, destined mainly for markets beyond Southeast Asia (Sheng, 2006: 2). As far as Chinese companies interacting with Southeast Asia are concerned, they find it difficult to compete in ASEAN markets, especially

32 Rising China, US Influence, and Southeast Asia

against the multinational corporations operating there. They lack capital and experience, and with the exception of enterprises in the less developed bordering provinces in Yunnan and Guangxi that provide only a very small portion of ASEAN-China trade, they lack a strong incentive to interact with ASEAN when more lucrative opportunities are available at home or in other foreign areas (Sheng, 2006: 3).

Assessing political, other influence Meanwhile, the limited influence China gains in Southeast Asia through exercises like Prime Minister Wen Jiaobao’s meetings in Malaysia in December 2005 and other prominent endeavours was also evident in a variety of in-depth assessments underlining continued wariness and hedging among many key Southeast Asian states that are reluctant to come under China’s sway. According to these studies, most Southeast Asian governments hold serious reservations about China’s role, particularly regarding such security issues as the South China Sea; and that despite differences with US policy; most Southeast Asian governments want the United States to continue to provide a security umbrella for the region. Long-term reservations over Chinese intentions have seen governments in Singapore and the Philippines engage China constructively but emphasise close security cooperation with the United States. The predominantly Islamic countries of Indonesia and Malaysia oppose major aspects of the US War on Terrorism, but seek improved military and other relations with United States, while they engage more closely with China. For geographic, historical and other reasons, countries along China’s land border have fewer options to oppose China openly, but Thailand has kept its options open by markedly improving military ties with the United States, and Viet Nam has moved forward with military ties with the United States in 2005–2006. ASEAN, meanwhile, has worked assiduously in recent years to reach out to the United States, Japan, India, the European Union, and other powers, providing a favourable strategic context as it seeks to engage rising China in constructive regional arrangements (Glosny, 2006; Sheng, 2006; Goh, 2006). Southeast Asian wariness of China’s leadership in the region was seen in the widely reported tug-of-war that occurred behind the scenes over the role and composition of the East Asian Summit. China supported the original Malaysian initiative in 2004 that envisaged an exclusive East Asian group, and it proposed Beijing as the site for the second summit in 2006. China had supported Asian groupings excluding the United States and other non-Asian powers in the past, and it

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continued to support the Shanghai Cooperation Organisation (SCO) as an exclusive regional body dealing with Central Asia. In 2005, it backed efforts by that body to exclude US and other US-related military involvement in the region. In a graphic demonstration of Chinese hard power, thousands of Chinese armed forces also teamed up with Russian armed forces in a large military exercise in August that was under the auspices of the SCO though it was conducted along China’s East coast, signalling Chinese power and firmness to Japan, Taiwan, and the United States. An exclusive East Asian summit with China playing a leading role was resisted by Singapore, Indonesia and others, who were backed by Japan. In the end, they succeeded in opening the East Asian summit to India, Australia, New Zealand, and Russia, all of whom were happy to play active roles that implicitly diluted China’s influence. The broadly representative East Asian summit left the door open to US participation. ASEAN also asserted its leadership as the EAS convener, with the second summit in 2006 now slated for Manila, not Beijing. Official Chinese comment reacted graciously with strong rhetorical support for ASEAN and its leading role, while accusing Japan of unwarranted leadership ambitions in Asia. The dizzying array of official Chinese meetings and interactions with Southeast Asian leaders in bilateral and multilateral settings often is contrasted with less active US official interaction with the region. Southeast Asian officials and commentators seem to ignore or play down substantial increases in the past few years in US diplomatic, economic, and especially military initiatives with a wide range of Southeast Asian governments. The advances in US-Southeast Asian military relations are generally handled in a low-keyed way, in contrast with the publicity surrounding China-Southeast Asian contacts. The Southeast Asian government complaints about alleged US “distraction” and “inattentiveness” in contrast with China’s activism seem to be out-of-date and old news; but they do have the effect of prompting even more US efforts to be positively attentive to them, and this presumably is a goal of the Southeast Asian governments (Jackson, 2006). With few exceptions like Myanmar and Cambodia, Chinese defence relations with ASEAN are still very limited and focus on reassuring Southeast Asia that China is not a threat. They seem likely to remain limited as many Southeast Asian security officers continue to be wary of China’s intentions and determined not to jeopardise or undermine what they view as important and growing defence ties with the United States. The Southeast Asian balance between the United States and

34 Rising China, US Influence, and Southeast Asia

China on defence issues is graphically on display each year at the US-backed Shangri-La Dialogue in Singapore, where the high-level attendance by ASEAN participants comes despite China’s obvious disapproval of the meeting (Sheng, 2006). Commentators and scholars in China and abroad have highlighted the rising appeal of China’s soft power in Southeast Asia. This often is contrasted with the decline in the US government’s image in the region as a result of the widely unpopular US war in Iraq and other controversial elements in the Bush administration foreign policy. Chinese cultural, language, and ethnic linkages are developing. About 15,000 Southeast Asian students were studying in China in 2004. Hundreds of thousands of Chinese tourists travelled to the region each year. Leading officials in Thailand and the Philippines publicly highlight their Chinese ancestry (Kurlantzick, 2006). However, China’s appeal remains limited among five main culture/ religions (Islam, Buddhism, Hinduism, Western-Christian, and ChineseConfucian) in Southeast Asia. The appeal of Chinese ideology and political system is strong among some Southeast Asians but lacking among others. The consequences of Chinese development and competitiveness alienates Southeast Asians concerned with environmental protection (e.g. regarding the Mekong River) and Southeast Asian labourers in enterprises unable to compete with Chinese counterparts and losing foreign investment that is gravitating to China. China’s interchange with Southeast Asia remains heavily dependent on the Chinese administration. China has little of the extensive nongovernment connections in business, education, religious organisations, and cultural exchanges built over the years by individuals from the United States, among others. US businesses are extensively involved in the region, with Singapore as a major hub of US international business activity. There are many more than 15,000 Southeast Asian students studying in the United States, even with enhanced visa restrictions after 2001. US religious and secular NGOs deal with a range of humanitarian, health, environmental, human rights and other issues in Southeast Asia (Sheng, 2006: 5).

Conclusion and outlook for China’s leadership On balance, it seems clear that it is easy to exaggerate the significance of rising Chinese prominence in Southeast Asia. China’s approach to the region has developed with some twists and turns over the past 15 years. It has several objectives, mostly focused on sustaining a

Robert Sutter 35

regional environment conducive to Chinese development and political stability. It reflects increased Chinese confidence in dealing with Southeast Asian officials, but also a continued Chinese wariness and defensiveness regarding US, Japanese and other actions; it shows a keen awareness that China is far from leading the region and is unlikely to be in that position for the foreseeable future, if ever. Media commentary and government officials continue to emphasise the positive in China-Southeast Asian relations. However, careful analysis shows adverse consequences for China-Southeast Asian relations flowing from the recent Chinese advances in economic competitiveness and trade; continued wariness of Chinese intentions by many Southeast Asian governments; limited attraction in Southeast Asia regarding Chinese government institutions and practices; and continued strong limitations in China’s role as an investor, aid provider, and defence partner. “China can’t dominate Asia; there are too many governments in Asia.” This response by a senior Chinese official to my question during an interview in Beijing in May 2006 reflects some of the realities of power in Asia that make Chinese leadership or dominance in Southeast Asia and other parts of the region unlikely under foreseeable circumstances. The findings of this writer’s private discussions with Chinese and other Asian government officials about China’s rise, the balance of influence in Asia, and Asian regional dynamics contradict much media and other public discourse in the United States and some parts of Asia that depict a rising and powerful China coming to the leading position in Asia at a time of US decline in the region. In contrast to these media and other commentaries, which focus on Chinese strengths and US weaknesses, government officials in Asia in private conversations and interviews show an equal awareness of Chinese weaknesses and US strengths in the region. They are also aware of how the many independent-minded governments in Asia “hedge” in reaction to China’s rise. These governments work quietly among themselves and with the United States to insure that their independence and freedom of action will not be negatively affected as China rises in prominence in the region. Such actions reinforce US leadership in Asia as China rises (US China Economic Security Review, 2006). Readers of this article can choose to adopt the one-sided view of those US media and other commentators who predict China’s dominance and US decline in Asia. US policymakers and opinion leaders tended to do the same thing in the late 1970s when the United States was indeed weak and divided after the defeat in Viet Nam and prevailing US media and other predictions said the rising power, the Soviet Union, would dominate Asia.

36 Rising China, US Influence, and Southeast Asia

The same kind of pattern prevailed in the late 1980s when respected US media and commentators said that Japan would dominate Asia as US influence in the region declined. Of course, those earlier predictions were dead wrong; they focused on the strengths of the rising powers, the USSR and Japan, and did not adequately consider their weaknesses; and they focused on the weaknesses of the United States and did not adequately consider its strengths. A more sensible path, in my view, is for readers of this article to assess carefully the more balanced and well calibrated views of Asian government officials and other observers who try to look beyond the headlines in China-Southeast Asian relations. While media, vocal nongovernment elites, and public opinion matter in some Asian countries, at the end of the day it is the government officials who make the foreign policy decisions. There are few failed states in Asia; most governments are strong and are expected by their constituents to lead. My research trip in spring-summer 2006 involved dozens of public seminars and workshops dealing with China’s rise and US leadership in Asia that were attended by several hundred non-government specialists and elites in 21 cities of eight Asian countries; and in-depth interviews and consultations on these subjects with 75 diplomats and government specialists in those countries. The trip followed my past interchanges with Asian government officials, including a similarly extensive research trip to the region in May–June 2004 (Sutter, 2006d). The main findings of this work are: • China is rising in influence in Asia, the part of the world where China always has exerted greatest influence; but China also has major limitations and weaknesses and has a long way to go to compete for regional leadership. • The power and interests of the United States and most Asian governments work against China ever achieving dominance in Asia. • The US image in Asia has declined in recent years and US foreign policy continues to be widely criticised. However, US ability and willingness to serve as Asia’s security guarantor and its vital economic partner remain strong and provide a solid foundation for continued US leadership in the region. Overall US influence in the region has not declined, according to every Asian official interviewed in 2006. • Most Asian governments manoeuver and hedge against China’s rise, and they find a strong US presence in Asia fundamentally important and reassuring.

Robert Sutter 37

References Asia’s China Debate (2003) Honolulu: Asia-Pacific Center for Security Studies. Ba, A. (2003) “China and ASEAN: Renavigating Relations for the 21st Century”, Asian Survey 43(4): 622–647. Breckon, L. (2002) “Beijing Pushes ‘Asia for Asians’”, Comparative Connections, October 2002. Breckon, L. (2003) “Focus is Elsewhere But Bonds Continue to Grow”, Comparative Connections, April 2003. Chanda, N. (2002) “China and Cambodia”, Asia-Pacific Review 9(2): 1–11. Cheung, J.Y.S. (1999) “Sino-ASEAN Relations in the 1990s”, Contemporary Southeast Asia 21(2): 176–202. Cheung, J.Y.S. (2001) “Sino-ASEAN Relations in the Early 21st Century”, Contemporary Southeast Asia 23(3): 420–452. “China-Southeast Asia Relations: Trends, Issues, and Implications for the United States”, Washington DC: The Library of Congress, Congressional Research Service Report 97-553F, 20 May 1997. Finkelstein, D. (1999) China’s New Security Concept. Alexandria, Va.: The CNA Corporation (April 1999). Fouse, “Japan’s China Debate”, in Asia’s China Debate. Funabashi, Y. (2002) “New Geopolitics Rages over Various Parts of Asia”, Asahi Shimbun, 15 January 2002. Available at: www.taiwansecurity.org Goh, E. (2006) “Meeting the China Challenge: The US in Southeast Asian Regional Security Strategies”, Washington, D.C.: East-West Center Washington Policy Studies, 16. Glosny, M. (2006) “Heading toward a Win-Win Future? Recent Developments in China’s Policy Toward Southeast Asia”, Asian Security 2(1): 24–57. Kang, D. (2003) “Getting Asia Wrong: The Need for New Analytical Frameworks”, International Security 27(4): 57–85. Kurlantzick, J. (2005) “How China is Changing Global Diplomacy”, New Republic, 27 June. Kurlantzick, J. (2006) “China’s Charm: Implications of China’s Soft Power”, Washington, D.C. Carnegie Endowment Policy Brief 47 (June 2006). Kyodo (1998) “Kyodo Reports on PRC Media Coverage of Indonesia Crisis”, 22 May 1998 carried by FBIS (internet version). Liaowang Dongfang Weekly (2004) “China’s Policy in the South China Sea”, 12 January. Available at: http://newsxinhuanet.com/mil/2004-01/12/content_ 1270457.htm. Marshall, T. (2006) “China Poised to Dominate in Influence in Asia”, Boston Globe, 13 August 2006. Reuters (1998) “China Says Actively Funding IMF Indonesia Plan”, 17 March (internet version). Richardson, S. (2001) “Sino-Cambodian Relations: Trends and Prospects”, Conference Paper, Washington DC, 1 June. Roy, D. (2002) “China and Southeast Asia”, Honolulu: Asia-Pacific Center for Security Studies, 1(4). Saunders, P. (2006) China’s Global Activism: Strategy, Drivers, and Tools, p. 14. Washington, D.C.: National Defense University Press Institute for National Strategic Studies Occasional Paper 4 (June 2006).

38 Rising China, US Influence, and Southeast Asia Shambaugh, D. (2003) “China Engages Asia: Reshaping the Regional Order”, 29(3): 64–99. Sheng, L. (2006) “China in Southeast Asia: The Limits of Power”, Japan Focus 1. Available at: http://japanfocus.org/products/topdf/2184. Sutter, R. (2000) Chinese Policy Priorities and Their Implications for the United States, p. 114. Maryland: Rowman and Littlefield. Sutter, R. (2003) “Chinese Policy Priorities”, in Bert, W. The United States, China, and Southeast Asian Security, pp. 114–115. London: Palgrave. Sutter, R. (2005) “China’s Regional Strategy and Why It May Not be Good for America”, in Shambaugh, D. (ed.) Power Shift, p. 297. Berkeley: University of California. Sutter, R. (2006a) “China’s Rise in Asia: Promises and Peril; China Rising: Power and Motivation in Chinese Foreign Policy”, Foreign Affairs, March–April, pp. 199–204. Sutter, R. (2006b) “China’s Rise and US Influence in Asia”, p. 21. Washington D.C.: East-West Center Washington Policy Studies. Sutter, R. (2006c) “China-Southeast Asia Relations: Emphasizing the Positive; Continued Wariness”, Comparative Connections 67–73. Sutter, R. (2006d) “China-Southeast Asian Relations: Progress with Limitations”, Comparative Connections 75–81. Tian, P. (2002) “Nationalism: China and Japan”, Foreign Affairs Journal 63: 63–83. “Testimony of Karl Jackson before the US”, China Economic and Security Review Commission, 3 August 2006. Available at: www.uscc.gov. Thayer, C. (2001) “Regional Rivalries and Bilateral Irritants”, Comparative Connections April 2001. Available at: http://www.csis.org/pacfor. The Stanley Foundation (2005) US Policy in Southeast Asia: Fortifying the Foundation, pp. 13–17. Muscatine, Iowa. US China Economic and Security Review Commission, 3 August 2006. Available at: www.uscc.gov. Womack, B. (2004) “China and Southeast Asia: Asymmetry, Leadership and Normalcy”, Pacific Affairs 76(3): 529–548. Xinhua (1998), “News Analysis Views ASEAN Challenges”, 21 July, carried by FBIS (internet version). Yee, H. and Storey, I. (2002) The China Threat: Perceptions, Myths, and Reality. London: Routledge. Zemin, J. (1997) “Speech at East Asian Summit”, Xinhua, 15 December, carried by Foreign Broadcast Information Service (FBIS) (internet version).

3 The Dragon, The Tiger Cubs and Higher Education: Competitive and Cooperative China-ASEAN Relations in the GATS Era Anthony Welch

Introduction Higher education is universally acknowledged as a key pillar in constructing the new knowledge economies of the twenty-first century. Each country wishes to deploy its higher education resources to its greatest advantages – to increase national competitiveness, enhance its economic growth rates, and raise its prestige internationally. Yet this occurs at the same time as nations worldwide struggle to reconcile the conflicting demands of an endlessly increasing demand for higher education, and an increasing limit on state capacity – itself partly a product of global economic re-structuring. This combination of aspiration, ambition, and constraint often leads to heightened pressures on higher educational institutions (HEIs) to diversify their income sources, including the marketing of their “product” to international students. Clearly, some nations are better placed than others to take advantage of what is becoming a growing global market for higher education, conservatively estimated some years ago at US$30+ billion annually (APEC, 2001), and perhaps 1.4 million international students by 2010 (McBurnie and Ziguras, 2001), a figure that has in fact already been doubled. At the same time, no single state possesses the resources to gain an advantage in all areas, or to attain complete international leadership. This is all the more the case, as massification of higher education becomes more widespread, including in Asia – but often can still not meet ever-increasing demand. Moreover, the increasing globalisation of higher education continues to breach national boundaries – creating new challenges but also opening up prospects for new alliances, often regional. Hence, higher education policies become a mix of competition and cooperation. This analysis addresses such 39

40 The Dragon, The Tiger Cubs and Higher Education

competitive and cooperative strategies in higher education between China and ASEAN, in particular the three ASEAN member nations of Singapore, Malaysia, and Viet Nam. Examples of regional trade agreements with an educational component, Asia-Pacific consortia in higher education, and cross-border institutional collaborations, are given in each case. A brief taxonomy of cross-border educational relations is developed, and policy implications summarised, based on the case studies. The worldwide rise in cross-border trade in educational services occurs against a background of the global transformation of economies, whereby the countries of the North are now characterised by the increasing dominance of service sector exports, relative to total GDP. Education is now increasingly recognised as one of these services, (rather than its earlier rationale as primarily educational and cultural), and is being exported vigorously by a growing number of states. In some states it forms a major component of total service sector trade, most notably in Australia. Other countries, often within the same region, are major nett importers of educational services, and pay a high price for that dependence. A further key issue is the complex relationship between national sovereignty and the promotion of cross-border trade in educational services. What is perceived as a barrier to trade by a major exporter of educational services, for example, may be seen as a legitimate defence of national identity, or local control over funding and standards, by the country which is the recipient of such services. The Asia-Pacific region, one of the most dynamic and diverse worldwide, including the two giants of China and India, provides a fascinating site for the analysis of the growing cross-border trade in educational services.

The setting China-ASEAN relations are already substantial and growing. ASEANChina trade grew from US$39.5 billion in 2000 to US$139.9 billion by 2006, or 10% of total ASEAN trade (ASEAN, 2009c). It grew by 20.4% annually over the decade 1991–2000, and has continued to rise, growing by more than 30% in the first quarter of 2003, a rate only outstripped by that with Russia, New Zealand and Australia (ASEAN, 2003b). China’s exports to ASEAN grew from US$4.1 billion in 1991 to US$17.3 billion in 2000, a rise of 422%. Over the same period, imports from ASEAN grew even more, from US$3.8 billion to US$22.2 billion, representing growth of 584% (ASEAN, 2001: 1). By 2008, ASEAN exports to China had risen to US$107.1 billion, while ASEAN imports from China totalled

Anthony Welch 41 Tables 3.1a and 3.1b 3.1a

ASEAN-China trade growth, 1991–2006

ASEAN’s share of China’s trade, 1991–2006 % Exports

1991 2000 2006

5.7 6.9 na

% Imports 6.0 9.9 11.4

(ASEAN, 2001; Vaughan and Morrison, 2006)

3.1b

CHINA’s share of ASEAN trade, 1991–2006 % Exports

% Imports

2.2 3.1 8.7

1.9 5.2 11.5

1991 2000 2006 (ASEAN, 2001, 2009a)

US$85.6 billion. ASEAN’s share of China’s foreign merchandise trade grew from 5.8% to 8.3% over the same period. ASEAN is now China’s fifth largest trading partner, while China’s share of ASEAN’s trade grew from 2.1% in 1994, to 3.9% in 2000 (ASEAN, 2001), and to 11.3% in 2008 (ASEAN, 2009b). While the regional economic crisis of the late 1990s profoundly retarded several ASEAN members’ economic growth, and global economic growth was subdued for a time thereafter, overall economic growth in ASEAN was a healthy 4.4% in 2002, and about the same rate in 2003 (ASEAN, 2003b). The Global Financial Crisis (GFC) of 2008–2009 crimped economic growth rates of ASEAN nations more than that of China, which still grew at a healthy 8% in 2009. China’s accession to WTO status in late 2001, after years of complex negotiations, was based on rather comprehensive liberalisation commitments, and should yield substantial trade measures, including in the service sector, that will open up new market opportunities, and expand existing ones. Nonetheless some ASEAN members report concerns with barriers to trade such as “unpredictable laws”, “uncertain standards”, and “restrictions on trading activities” (Tham, 2001: 63). Others, such as the Philippines see potential for its many professionals, many of whom speak English, to work in China’s booming economy (Palanca, 2001). Simulations show that bi-lateral China ASEAN trade is likely to grow, if offset to

42 The Dragon, The Tiger Cubs and Higher Education

some degree by a reduction in trade with other partners. Trade in services, including in education, is seen as remaining a modest component of overall China-ASEAN trade. Overall, and notwithstanding some difficulties, Asian regionalism is on the rise (ADB, 2008b).

The potential China and ASEAN finally signed an agreement to cut barriers to trade in services in January 2007, following earlier agreements on merchandise trade in July 2005 (China Daily, 2007). An FTA between China and ASEAN, that came into effect in January 2010 created a regional economy with a total population of 1.7 billion, a regional GDP of at least US$6 trillion, and total trade estimated at US$4.5 trillion. (If Japan, which declared its accession to the ASEAN Treaty of Amity and Cooperation [TAC] in Tokyo in December 2003, after China and India endorsed it at the Denpasar ASEAN meeting in October, were to be added to this group, creating an East Asian FTA, as Singapore’s Prime Minister Goh again recently suggested, the total capacity would be enormously expanded. The combined population of such a community would then be two billion, with a total GDP of several additional trillion). The removal of trade barriers would have the capacity to increase existing levels of trade substantially, particularly in the service sector, notably educational services. Given the increasing globalisation of higher education, especially in English, but in the future perhaps increasingly in Chinese, and given too the significant English and Chinese-speaking Chinese diasporas in Singapore and Malaysia (see below for details), the potential for increasing regional trade in higher education services, and for more partnerships between universities in China and ASEAN, is great. China’s formal signing of the TAC commits it to the three pillars of cooperation: political and security; economic; and socio-cultural. Key strategic partnerships, and enhanced economic and cultural cooperation, between China and ASEAN are major outcomes to be expected, as well perhaps as a greater sense of community among ASEAN members and China. ASEAN is likely to become a greater focus of China’s investment strategies, including key investments and partnerships in higher education, especially as trade liberalisation measures are further implemented within China and ASEAN. Trade and investment facilitation measures, to promote trade in services between China and ASEAN is specifically listed in paragraph 14.1 of the Report of the Expert Group on Forging Closer ASEAN China Economic Relations (2001), and various sectors are listed as ongoing areas of development in the Database on

Anthony Welch 43

Cooperation Progressing in the ASEAN+3, and ASEAN+1 Cooperation Frameworks (2008). Current efforts are directed towards a road map sketching how ASEAN economic integration (notably including key service industries such as tourism) is to be achieved by 2010, including an FTA with China. Interestingly, part of the pressure stems from the pace of integration among other regional trading blocs. As Indonesian Trade Minister Suwandi argued in early 2004 “We need to achieve this fast and smoothly because now the world has been divided into regional blocs – in Africa, in Latin America, and the European Union is expanding with an additional 10 members in May” (Japan Times, 2004). Data on the breakdown of ASEAN-China trade in services is notably lacking, however, including the lack of detailed information on trade in educational services. This is something that further research should attempt to address. An attempt to partially redress this omission is made below, where sufficient evidence is provided to sketch the growth of the trade in educational services in higher education, worldwide, and within the region. The implications of this rise for China-ASEAN relations are sketched in the final section of this paper.

Implications of China’s entry into WTO China’s accession to the WTO poses new challenges and opportunities within the region, and for ASEAN members in particular. Its accession increased the openness of the Chinese economy, something that necessitates further re-structuring in numerous sectors of its economy, with a consequent growth in internal efficiency. As will be seen below, this certainly includes the higher education sector, where domestic criticism is now both more open, and more commonly voiced, of the relatively low levels of internal efficiency within its universities (see below). China’s willingness to open its education sector to external competition supports the overall assessment of the OECD: With accession to the WTO, China will be a more powerful driver of growth, and that momentum could, in turn be harnessed by the ASEAN countries. Market opportunities for both regions will be created by China’s liberalization and … restructuring. Those market opportunities will also mean more import competition for domestic enterprises in ASEAN (OECD, 2000: 24). This is all the more the case for countries that have a significant Chinese minority, and for those, such as Singapore, where Chinese (Mandarin)

44 The Dragon, The Tiger Cubs and Higher Education

is widely spoken. At the same time, however, as is argued below in the section on the challenge of internationalisation for Chinese universities, China’s unwavering orientation towards the USA as the source for all innovations in higher education may restrict this potential for regional cooperation.

Rise in service sector trade Service sector trade is rising fast worldwide, including with China, where services currently represent about one-third of total GDP (World Bank, 2005; OECD, 2003c). From 1990–2000, growth in services output worldwide, grew at an annual rate of 2.9%, double that of agriculture (1.4%). This is all the more the case for developing countries, where for example, growth in commercial services trade grew by an annual 9.0% from 1990–2000, compared with 5.5% for developed nations. The World Bank’s estimate is that liberalisation of services in developing countries could add some US$6 trillion by 2015; four times that which would accrue from the liberalisation of trade in goods. By 1997, it is estimated that global trade in services had reached a total of US$1.295 trillion, around 25% of the overall figure for global trade in commodities (Robertson et al., 2002: 479). Fifty-five countries have made commitments under the Global Agreement on Trade in Services (GATS). A majority of these are developing countries. Interestingly, however, despite the explosive rise in crossborder trade in education, only three proposals deal with education, one of them being China. Asia saw strong growth in service sector trade relative to other world regions over the decade 1990–2000, with an annual rate increase of 9%. Developing Asia’s rate of growth was even higher at 11% for the same period, while that of China was 18%, Malaysia 14%, and Singapore 8%. (Hong Kong growth was an annual rate of 9% for the decade.) This compares with a worldwide rate of just 6% for the period (WTO, 2002: 12). Of leading individual exporters and importers over the same period, the combined figure for Hong Kong and China was a total of 5.2% of total world trade in commercial services (WTO, 2002: 13–14). Current ASEAN commitments are to the free flow of services: “… remove substantially all restrictions on trade in services by 2015”, although it should be noted that this is within ASEAN (ASEAN, 2008: 10).

GATS and trade in educational services The rise of what is now often termed trade in educational services has paralleled the overall rise in service sector trade. In itself this transition

Anthony Welch 45

is noteworthy, representing a shift from an earlier era, when “governments and international bodies … promoted student mobility mainly for cultural and educational reasons” (OECD, 2002: 98). While these reasons are still pertinent, at the individual student, host university, state, and international levels, the growth of a global fee-paying market for international students is a striking development, that in itself contributes to the rising tide of service sector trade. Earlier estimate of total income generated by international students in 1998 (including their associated living costs) at a minimum of US$30 billion worldwide, or some 3% of the total value of service sector exports (OECD, 2002: 99), have been massively expanded. While earnings figures are notoriously difficult to calculate accurately, especially comparatively, Table 3.2 gives an indication of the striking increase in income derived from international students, by key host countries, over the past two decades. The data in Table 3.2 underline that, while the education component is now a significant element in overall service sector trade, it is much much more so for some countries than others. Australian exports of educational services, for example, have now risen to be a larger export earner than some traditional agricultural commodities, for example: in the year 2000, earnings from higher education added an estimated at least US$2.15 billion to the Australian economy (OECD, 2002: 99), and by 2008, an estimated US$8.0 billion. Such exports now account for almost 12% of Australia’s total service sector exports. As for Canada, this makes education exports one of the largest industry sectors in the country (OECD, 2002: 100; DFAITE, 2009). In New Zealand, by the early 1990s, earnings from international student fees had already outgrown those from its wine industry, while by 1996, US exports of educational services earned a total US$8.2 billion, producing a trade surplus in the sector of some US$7 billion (Robertson et al., 2002: 479). In 2000, the US earned a total of US$10.28 billion from international students (OECD, 2002: 99), rising to US$15.5 billion in 2008. Trade in educational services can take various forms, and GATS has developed fourfold taxonomy, as follows (see Table 3.3). Within the region, both Australia and more recently New Zealand, have been spectacularly successful in developing the scale of international enrolments in their universities (the latter on a much smaller scale). Overall, Australia, for example, increased its international enrolments in higher education by almost 350% over the 1990s, and well over 1,000% from 1980–2000 (Welch, 2002). Over the period 2000–2006, international enrolments rose by 75% in Australia, 57% in Canada, 48% in the UK and 23% in the USA (OECD, 2008a: 366). In Australia, such

46

Table 3.2 Export earnings from international students (higher education), selected major providers, 1989–2008, and percentage of total national service sector trade 1989 US$ billions Australia Canada UK USA

0.584 0.530 2.214 4.575

1997

% of total service exports 6.6 3.0 4.5 4.4

2000

US$ billions

% of total service exports

US$ billions

2.190 0.595 4.080 8.346

11.8 1.9 4.3 3.5

2.155 0.796 3.758 10.280

(OECD, 2002: 99; DFAIT, 2009; IIE, 2009; UNCTAD, 2008)

2008

% of total service exports 11.8 2.1 3.2 3.5

US$ billions 8.0 3.1 11.2 15.5

Total service sector trade 2006, US$ billions 33,088 59,332 229,600 418,848

Anthony Welch 47 Table 3.3

Modes of provision of cross-border educational services

Mode

Explanation

Examples

Size & Potential

1 Cross-border supply

The service, rather than the person, crosses the border

– Distance education – Education Software – Virtual education (including corporate training)

Small, but growing swiftly, with considerable growth potential, esp. via ICT

2 Consumption The consumer abroad moves to the country of the supplier

Students who study in another country.

Currently, the largest share of international education.

3 Commercial presence

The provider uses or establishes facilities in a second country

– Local university, or satellite campus – Private providers, including language and IT

Growing phenomenon, with strong likelihood of growth

4 Presence of natural persons

Persons travelling Professors, teachers, Given rising to a second country educational professional to provide a service consultants mobility, also likely to grow strongly.

(Adapted from OECD, 2002: 92)

enrolments were initially almost entirely composed of mode 2 form; however what is termed “offshore” enrolments, comprising both Modes 1 and 3, is now the most swiftly rising category, both because of lower overall costs to the student, and less interruption to career and family. Some of these students may spend some time in the host country (Mode 1), while staff from host country universities now often travel to teach for intensive periods in the students’ home country (Mode 4). The share of Australian enrolments that were “offshore” rose from 24% to 37% of the total, between 1996 and 2001 (OECD, 2002: 103–104). Corporate universities such as those run by Motorola, or Microsoft, some of which have licensing arrangements with conventional universities, as well as Phoenix university (whose enrolments now total over 100,000 across several countries), are now attracting more and more enrolments, particularly in the area of professional development.

48 The Dragon, The Tiger Cubs and Higher Education

There are a number of qualifications regarding this rising phenomenon that should be borne in mind, however: North South inequalities As with other forms of trade, some nations and regions gain while others lose. This works in several major ways. Firstly, the trade is very unequal, as evident in the earnings listed above, with the most developed nations of the North able to exploit their advanced infrastructure (high quality universities with well-qualified staff, research infrastructure, well-stocked libraries etc) to export educational services to the South, often the Asia-Pacific region. Of the total of 2.9 million international students in 2008, over 1.43 million, or 49% originated from AsiaOceania. Sometimes, this unequal flow has been categorised as a form of neo-colonialism – less brutal, but just as unequal as the older forms. Clearly however, the status of an overseas degree, from a major overseas university, whether Oxbridge, the University of Tokyo, MIT, or the University of Sydney, continues to carry significant cachet. Overall, it has been estimated that OECD nations host 85% of all international enrolments worldwide (OECD, 2002: 95), with six countries accounting for 75% of all international students in OECD (see Table 3.4). Overall, the number of international students in higher education has doubled over the past 20 years in OECD countries and, in the late 1990s, was growing almost twice as fast as domestic enrolments (9% annually, over the period 1995–1999, compared with 5.5% for domestic enrolments). This loss of much of the substantial educational investment by third world nations in developing their young talent is often exacerbated by

Table 3.4 International students in OECD countries, by number and percent, 1999 and 2006 Country

No. of students 1999

% of total OECD 1999

No. of students 2006

% of total OECD 2006

USA UK Germany France Australia Japan

451,934 232,538 178,195 130,952 99,014 56,552

31% 15% 12% 9% 7% 4%

572,509 300,056 260,314 237,587 166,954 117,903

20.0% 11.3% 8.9% 8.5% 6.3% 4.4%

(Compiled from OECD, 2002: 94; OECD, 2008a: 353; UNESCO, 2006: 130–132. NB. Definitions of foreign students have changed)

Anthony Welch 49

“brain-drain” effects, especially when many of the most developed nations have recently refined their migration programmes to “cherrypick” for certain skills. It is now the case, for example, that international students comprise the largest single category of applicants for Permanent Residence in Australia. Canada, too, has revised its points formula to give greater weight to those with tertiary qualifications, while Germany recently introduced a form of “Green Card” scheme, to attract highlyskilled workers, largely from the South. Partly in an effort to stem the tide, China introduced similar provisions in 2004. This loss of talent has long been a significant problem for China, where it is estimated that less than a third of students sent abroad to study, have returned. This haemorrhage represents a huge, ongoing loss of its best and brightest, notwithstanding rising return rates and current efforts to mobilise the Chinese diaspora more effectively (see Table 3.4). Another way of viewing the dominance of OECD nations in international student enrolments is evident in the following figure: Figure 3.1

Host countries for international students, 2001 Other non-OECD 7%

Other OECD 7%

Sweden 2%

Switzerland 2%

Italy 2% Austria 2%

US 28%

Belgium 2% Spain 2% Japan 4%

UK 14%

Australia 7% Germany 12%

France 9%

(OECD, 2003a: 275)

Dominance of English-speaking nations What is also evident from the above is the dominance of this “trade” by English-speaking nations, with the four main English-speaking countries accounting for 54% of all international enrolments (OECD, 2002: 94), and for some 70% of students from Asia/Oceania. Details of individual countries and totals for the four largest English-speaking host countries,

50 The Dragon, The Tiger Cubs and Higher Education

together with changes in their relative share, appear in the following table. Table 3.5 English-speaking countries’ share of international students, by origin, 1995 and 1999 (%)

Asia/ Oceania

USA 1995

USA 1999

UK 1995

UK 1999

49

44

7

11

Austr 1995

Austr 1999

12

13

Canada 1995 5

Canada Total 1999 share 1995 2

73

Total share 1999 70

(Adapted from OECD, 2002: 96)

While the relative share of total international student enrolments by English-speaking nations slipped somewhat from 73% in 1995 to 70% in 1999, most notably in the USA (OECD, 2008a: 358), the importance of English language as a basis for internationalisation of higher education remains a significant regional element, including in China (Yang, 2002). The implications of this will be considered below, but it is important to remember that, within the region, the number of Putonghua (Mandarin) speakers is equivalent to those who use English – each totalling around one billion (OECD, 2003b: 5). It may well be, indeed, that with the rise of greater China as an economic and cultural force in the world, including the recent spectacular rise of Confucius Institutes worldwide (numbering some 280 in 2009), Mandarin may become a more important medium in higher education, and this too is not without significance for regional collaboration with countries that have significant Chinese ethnic communities. Of the three considered in this analysis, perhaps the most notable is Singapore, which lays claim to both languages, and has the most sophisticated system of higher education. Regionalism Asia collectively accounts for more international students sent to major host countries of the North than anywhere else – 45% of all international students enrolled in OECD countries – with the largest single nation of origin being China (including Hong Kong) at 9% (OECD, 2002: 97). The implications of this, too, are significant for the analysis provided in this paper: the sheer scale of the Chinese system, and the limited domestic institutional capacity (notwithstanding considerable expansion, as detailed below), offers considerable scope for regional collaboration, as will be argued below. One effect of the regional financial crisis of the late 1990s was to suppress somewhat the proportion of

Anthony Welch 51

students from Asia travelling to another country to study, but only temporarily – the number of Asian students studying abroad has recovered, and continues to grow. To some extent regionalism, in the form of geographical and/or cultural proximity, plays a role in the choice of destination of Asian students. (This is even more the case for international students from the Americas, and from Europe, each of which cohort overwhelmingly study within the region). The destination of students from the Asia-Oceania region is shown in the following table. Table 3.6 percent

Destinations of students from Asia-Oceania, 1995 and 1999, by

Destination 1995

Destination 1999

Student origin

Europe

EU

Americas

AsiaOceania

Europe

EU

Americas

AsiaOceania

AsiaOceania

25

23

54

21

30

28

47

23

(OECD, 2002: 97) NB. Data includes only OECD member nations but, as seen above, this accounts for the bulk of international enrolments.

What the above figures reveal is that although the US share has dropped somewhat, and the EU risen, the regional share of international enrolments has also grown, to a degree. That is, relatively more students from Asia-Oceania are now studying within their region. This has significant implications for regional collaboration. Overall regional patterns of concentration also reflect to a degree, the effects of regional mobility schemes such as ERASMUS/SOCRATES in the European Union (EU), and on a much smaller scale the influence of regional schemes such as APEC/ UMAP. The signing by China of the Treaty of Amity and Cooperation (TAC) with ASEAN at an ASEAN+3 summit in Bali in October 2003 (followed two months later by Japan), also provides scope to further enhance regional collaboration within higher education. Barriers or defences? As alluded to above, quite what constitutes a barrier to trade is by no means fully agreed. What is perceived as a trade barrier by a large provider, from a wealthy, highly-developed country, may well be seen as a defence of standards and quality, national integrity, or identity, by a developing country recipient. Intellectual property rights, too, may be considered to be of great importance to the overseas provider; but less significant to the recipient country. Such dissonances remind us

52 The Dragon, The Tiger Cubs and Higher Education

too, that the related issue of quality in higher education can equally be a problematic term, in more than one sense. Certainly, quality assurance measures in higher education are fairly common among AsiaPacific countries (APEC, 2001). Indeed, virtually all such countries now have detailed programmes, legislation and regulations. Even domestically, however, they may at times be honoured as much in the breach than the observance, for a variety of reasons – inadequate state capacity, corruption and cronyism, and related issues (Welch, 2003; Tipton et al., 2003). Notwithstanding claims by APEC, which seem to have been uncritically accepted by some OECD researchers (2003c), a note of caution is in order here. If, as more detailed research in Southeast Asia has recently shown (Welch, 2007a and b; Tipton et al., 2003), state capacity to regulate domestic institutions for quality, notably including private sector HEIs, is often problematic, it might well be even more so for international providers, functioning under Mode 3 (Commercial Presence). There is certainly evidence, for example, that degree mills operate in the Asia-Pacific area, just as in other parts of the world – and that regulatory authorities and ministries in relevant countries are very concerned about how to control such entrepreneurial activities, and limit the damage they can inflict on legitimate institutions, and sometimes unwary students. Both the Malaysian, Vietnamese and virtually all other governments in the region, however, are still struggling with this problem (see below). The following section sketches principal developments shaping the economy and society of China, as also that of the ASEAN Three – Malaysia, Singapore, and Viet Nam.

China – the dragon abroad China’s rising economic, and political weight, is re-shaping the global economy, as well as cultural and international relations, all the more so in neighbouring ASEAN. From 1990–2000, its exports grew by 300% – from US$62.1 billion to US$249.2 billion (WTO, 2001a), and its foreign trade grew by 15% annually (ASEAN, 2001). China’s GDP growth has averaged 10% annually since 1990, the highest rate in the world. Its GDP for 2001 was estimated at US$1,150 billion and GNI per capita at US$3,950 in PPP terms (World Bank, 2005). From 1990–2000, the flow of foreign direct investment (FDI) into China grew more than tenfold – from US$3.5 billion to US$40.77 billion – while China also became the single largest recipient of FDI, worldwide. This represented a leap from about 10% of all FDI to developing countries to 17%, over the same

Anthony Welch 53

period, particularly as FDI flows to ASEAN fell in the aftermath of the late 1990s regional currency crisis, from US$32.5 billion in 1997, to US$13.8 billion in 2000 (UNCTAD, 2001). While not continuous, this decline in FDI occurred again in 2002, falling to US$12.4 billion, although more evident in manufacturing than in the service sector (ASEAN, 2003b). While by 2008, FDI to ASEAN had risen US$59.4 billion (ASEAN, 2009a), China’s inflow had reached US$66 billion in 2004, US$72.4 billion in 2005, and by 2008, US$92.4 billion (China Daily, 2006; China Briefing, 2009). This trend of FDI flows moving to China is only likely to increase, as a result of its accession to WTO membership, and the progressive implementation of its wide-ranging commitments to market liberalisation measures, particularly over the first five years of the agreement. At the same time, however, China’s economic growth has entailed both significant re-structuring of industries, with an attendant, and at times openly contested, end to the “iron rice bowl”. The painful process of restructuring has, inter alia, exacerbated regional inequalities significantly, posing significant social and political problems domestically. Indeed, each of these problems could deepen over coming years – profound existing inequalities of wealth are likely to worsen, and industry failures rise, consequent upon increased competition from external providers, after joining WTO: China is facing increased regional disparity and growing gaps in the income level of different groups of the population. This is one of the most serious social problems arising from the development process. The acceleration of liberalisation and competition arising from China’s implementation of its WTO commitments may make these problems worse (ASEAN, 2001: 17). Nonetheless, China has generally managed the tensions of developing a Socialist Market Economy well, albeit without an overall master plan. Deng Xiao-Ping characterised the process as rather like crossing a river, by feeling for stones at every step (Tipton et al., 2003: 200). This strength, and a non-convertible currency, meant that the Asian financial crisis of the late 1990s, and the global financial crisis (GFC) of 2008–2009, affected China less severely; indeed, its capacity to sustain the value of the RMB, as also its actions to assist key neighbours, prevented a bad regional situation becoming even worse. Largely as a result, the subsequent priority attached to ASEAN-China links, now sustained by annual meetings, increased significantly. China’s investments in ASEAN have been relatively modest, rising from US$136 million in 1999 (less than

54 The Dragon, The Tiger Cubs and Higher Education

1% of total FDI into ASEAN, although a much higher proportion than before the Asian financial crisis) (ASEAN, 2001: 13), to US$1.44 billion in 2008, or 2.4% of total ASEAN FDI (ASEAN, 2009a). While intensified competition, and surging imports, consequent upon WTO market liberalisation, forced some small and medium Chinese companies into bankruptcy, including critical challenges to service sector industries, it is not clear that this necessarily affected the Chinese higher education sector to the same extent. This is partly due to language issues, but it is also pertinent to be reminded that China has not exempted its (higher) education system from competition, under GATS. As seen in the following section, there are however significant internal pressures within the Chinese higher education system that make foreign universities more competitive, notably the competitive advantage of having a foreign degree – plus perhaps the associated foreign language and international work experience – within the Chinese job market.

The ASEAN Three – rise of the tiger cubs The three ASEAN member states selected in this analysis for a review of their relations with China in higher education are, as indicated above, Singapore, Malaysia, and Viet Nam. They differ widely, yet have some elements in common. Why choose these three? The three countries selected show differing levels of engagement in terms of their overall interaction with China, and range in their scope to extend bi-lateral relations in higher education. Each seeks to expand the scope, reach and quality of its higher education system, either via becoming a regional educational hub (Singapore and Malaysia), or adopting external reforms, including from China (Viet Nam). A second, related rationale is that each of the ASEAN Three has a significant Chinese diaspora, in every case an artefact of each country’s complex histories of Chinese engagement. While Viet Nam’s Chinese minority is by far the smallest, in each case the relevant Chinese community carries considerable weight within the national economy, as Table 3.7 underlines. A more recent analysis outlined a number of contours to this Chinese demographic: The relative wealth of the Chinese communities, their emphasis on education, their orientation towards commerce, and their tendency to live in urban areas, all mean that Chinese are over-represented in

Anthony Welch 55 Table 3.7 1990s

Size and role of overseas Chinese in ASEAN Three economies,

Country

Chinese population

Percent of total

Role in economy

Malaysia

5,400,000

29.0

61% of share capital, 60% of private sector managers

Singapore

2,079,000

77.0

81% of listed firms, by capitalisation

Viet Nam

1,000,000

1.5

Before 1975, 80% industry, 100% wholesale for foreign trade, 50% retail: 1986 Doi Moi 45% of registered private firms 1992.

(Department of Foreign Affairs and Trade (DFAT), (East Asia Analytical Unit), Overseas Chinese Business Networks in Asia. Canberra, DFAT, 1995: Ch. 3)

secondary and tertiary enrolments. It also means more specifically that they are over-represented in high technology areas such as the ICT sector, both as professionals and among the firms that are implementing ICT solutions. Nevertheless, the prejudices they still encounter, mean that Chinese are still under-represented in the government bureaucracy, and especially at the higher levels (Tipton et al., 2003: 14). Despite such ongoing discrimination in some Southeast Asian states (in the 1970s, Viet Nam passed anti-Chinese legislation, while Malaysia’s New Economic Policy (NEP) explicitly discriminated in favour of ethnic Malays), private capital still is disproportionately held in Chinese hands: … much of the private capital available for investment is in the hands of Chinese firms … (which) are known for their large cash balances, and for their reluctance to share details of their internal workings with outsiders. Often attributed to a Confucian emphasis on the family, these characteristics can also be seen as a strategy of defence in a potentially hostile environment (Hamilton, 1996; Tipton et al., 2003). Of note, too, are regional trading connections between the ASEAN Three, notably for example that Singapore replaced the Soviet Union

56 The Dragon, The Tiger Cubs and Higher Education

as Viet Nam’s principal trading partner in the 1990s, and is still (with Japan), the largest source of her imports. Malaysia is the fourth largest site for Singapore’s FDI (see below). The second rationale for the selection of these particular ASEAN Three member states, is their spread in terms of social, economic and educational indicators. The fact that they are at significantly different levels of economic and educational development, helps explain that each has different interests in China, including in the higher education sector, and that strategies of competition and cooperation may well differ. Something of the diversity within the ASEAN Three, with respect to conventional measures of development is captured in Table 3.8. 2007 growth rates represented a significant resurgence from 2001, when for example, growth rates for Malaysia were 0.32%, and for Singapore –2.37% (ASEAN, 2001).

Malaysia – Economy, society and trade with China Malaysia’s current population of just over 25 million comprises three principal elements: a 58% Malay and other indigenous majority, a substantial Chinese ethnic minority of 26%, and a much smaller Indian minority, of some 7%. While Islam is the religion of the majority, Buddhism, Daoism, Hinduism, Shamanistic and Sikhism are also practised. While Bahasa Melayu is the official language, English is widely spoken and acknowledged as a language of commerce and “knowledge” (see below), while several Chinese dialects are also spoken (Cantonese, Hokkien, Foochow, Hakka, Hainan), as well as Tamil, Punjabi, Telugu, Thai, Malayalam, and in East Malaysia, several indigenous languages. Malaysia’s post-colonial development was in large part shaped by its ethnic composition and history. From 1948, the new Federation of Malaya restricted citizenship to ethnic Malays, who subsequently dominated the “administocracy”. The subsequent expansion of the federation to include Sarawak, Sabah, and crucially, Singapore (75% Chinese) proved short-lived. Political rivalries ultimately led to the expulsion of Singapore from the federation in 1965. Violent race riots in 1969 were followed by the New Economic Policy (NEP), that both imposed quotas in education, employment and access to capital upon non-Malays, and introduced incentive schemes encouraging non-Malay employers to hire ethnic Malays. Although the NEP officially ended in 1991, the state continued to lead Malaysia’s development, and discriminate in favour of ethnic Malays (termed Bumiputras, or sons of the soil). Despite sustained

Table 3.8 Country

China Malaysia Singapore Viet Nam

ASEAN Three + China – Economic and educational indicators Population 2007 (millions)

1,200 27.2 4.6 85.2

HDI and Employment Adult FDI total Nett FDI % GDP Service sector rank in services literacy 2007 as % of growth growth rate (2005) (%, 2004) Rate (15+) (US$b) GDP (2007) (2007) (2007)

.777 (81) .877 (65) .922 (25) .733 (105)

– 55.1 76.3 24.7

93.3 91.9 94.4 90.3

121.4 –2.6 11.8 6.6

3.7 –1.4 7.3 9.3

11.9 6.3 7.7 8.5

12.6 10.0 7.8 8.7

Trade in services Balance, % of GDP (2006)

Gov’t. education spending as % of GDP (2006)

–0.3 –1.2 –2.1 –2.0 (est.)

3.5 5.4 3.1 –

(ADB, 2008a)

57

58 The Dragon, The Tiger Cubs and Higher Education

intervention, including scrapping the Bumiputra quota that required 30% of the stake in companies listed on the Malaysian stock exchange to be held by ethnic Malays, the professions are still dominated by nonMalays, while the income gap between Malays and non-Malays has also persisted – indeed also widened among Malays. A small group of around 100 families was still said to dominate the economy. While annual GDP growth of an impressive 8.5% was achieved during the early and mid-1990s, together with low inflation, and diminishing levels of external debt, the regional financial crisis of the late 1990s nonetheless hit Malaysia hard – although less so than neighbours such as Indonesia, or Thailand. Within a short space of time, around US$100 billion had been erased from the stock market, while the Ringgit and the stock market ultimately lost about half their value. Nonetheless, Malaysia continued to open its economy, cutting its import tariffs by almost half between 1993 and 2001 (ASEAN, 2001). Maintaining an annual GDP growth of 5.1% in 2008, in the face of the GFC, was underpinned by China trade, which grew by an average 25% per annum over the preceding decade (China Daily, 2009d). The fact that Malaysia was the first ASEAN country to recognise China, in 1974, proved particularly prescient, in light of China’s subsequent dramatic rise. The current agenda is a potentially contradictory mix of both stateguided development, and the extension of globalisation and marketbased economic re-structuring. The current big picture of Vision 2020, by which date Malaysia plans to reach developed status, is centred on the familiar knowledge economy. It entails special development of two key sectors – information and communications technologies (ICTs), including a Multimedia Super Corridor (MSC), development of which began in 1996; and education, most particularly higher education. FDI, at US$5.7 billion in 2008 (ASEAN, 2009a) remains substantial, but market based-policies threaten the privileged position of ethnic Malays. Hence the “electoral arithmetic” remains somewhat unstable (Tipton et al., 2003: 115), as was seen in the 2008 elections. For the rapid development of the country, there is a need to cultivate the totality of Malaysian talent; but this cuts directly across the interests of privileged Bumiputras. The technology to support leading edge communications, including virtual pedagogy in higher education, has developed rapidly in recent years. Of Malaysia’s 25 million inhabitants, more than eight million subscribed to a mobile phone service, and over two million to the internet. Annual growth for each is robust, but significant regional disparities persist. While plans and targets for Vision 2020 remain very

Anthony Welch 59

ambitious, doubts remained about progress: “As yet, the vision has not become reality” (Tipton et al., 2003: 130). The MSC, critical to Malaysia’s goal of reaching parity with developed countries by 2020, involved major investments in such infrastructure as fibre-optic cables; time will tell however, as to longer-term results. Total GDP in 2002 was estimated at US$210 billion, in PPP terms, while growth was 4.2%, rising to 5.3% in 2005 (World Bank, 2005; Welch, 2009). Services comprised 48% of total GDP in 2001. GDP per capita fell from a high of US$4,766 in 1996 to US$3,257 in 1998, but recovered to US$3,914 in 2002 (ASEAN, 2009a). Trade between Malaysia and China reached US$53 billion in 2008, with Malaysia replacing Singapore as China’s largest trading partner (China Daily, 2009g). ASEAN statistics show that Malaysia’s exports to China increased from US$1.249 billion in 1993 to US$3.491 in 2001, but Chinese imports rose much more swiftly – from US$0.816 billion to US$5.12 over the same period (ASEAN, 2009a). This still represents however, a small proportion, with current exports to China being estimated at only 8.8% of total exports (China Daily, 2009i). Imports from China represent 6.0% of total Malaysian imports. Equally, principal destinations for Malaysian investments tend to be Singapore, US, Hong Kong and the UK, with China accounting for only about 2% of the total in 2000 (Tham, 2001). Nonetheless, Malaysia’s investments in China for the first half of 2009 rose to US$229 million from US$139 million for the equivalent period of 2007 (MITI Malaysia, 2009). While 950,000 Chinese tourists visited Malaysia in 2008, education too is a focus of increased trade (China Daily, 2009g, i), as is seen below.

Singapore – Economy, society and trade with China Somewhat like Malaysia, the small but vibrant, multi-ethnic Singapore, which only gained self-government from the UK in 1959, grew strongly for much of the 1980s and 1990s, under the strong, directed leadership of Lee Kuan Yew. With a size of just 648 square kilometres, a total population of just 4.6 million in 2009 (three quarters of whom are of Chinese ethnicity), and few natural resources, Singapore has always felt it had to rely on its own wits to succeed, principally the energy, skills and industry of its inhabitants. High state capacity has been deployed to create, inter alia, a sophisticated ICT platform, that leaves it well positioned to take advantage of service sector growth. Singapore’s service sector exports reached S$97.0 billion in 2006 (Singstat, 2007a). Singapore exhibits many features of a highly developed economy. Its workforce of 1.5 million is comparatively well educated, and its GDP of

60 The Dragon, The Tiger Cubs and Higher Education

US$120.7 billion in 2001 (rising to US$182 billion in 2008) yielded a GNI in PPP terms higher than that of New Zealand, and not much below that of Australia, Hong Kong, or Japan (ASEAN, 2003b; OECD, 2003c; World Factbook, 2009a). By 2008, the service sector comprised 72% of total GDP (World Factbook, 2009a). Singapore is not merely a poly-ethnic state, but it also possesses a highly international environment: a striking feature of its workforce of some 1.5 million, is the high proportion of international employees: 29% in 2000 (Yap, 2003: 368). Of these, fewer than one in five were professionals however, and only 13% held degrees. It should be pointed out that this figure excludes those who have been granted residence, a significant number of whom, by contrast, are highly skilled. 43.5% of foreign-born workers resident in Singapore between 1991 and 2000 held a degree (Yap, 2003: 375). One estimate showed that they were responsible for almost 37% of total GDP growth over the 1990s (Yap, 2003: 370). Illegal migration is also an issue, including from China. Some 200,000 Singaporeans also work abroad, although details about their destinations are incomplete (see below). Singapore has invested heavily in ICT, with impressive results. Among other things, the establishment of a widespread, sophisticated ICT infrastructure means that it is well placed to take advantage of the developing architecture that supports distance and online learning and teaching. Its National Information Technology Plan (NITP) dating from the mid1980s, already heralded its plan to gain a competitive advantage through advanced ICT infrastructure. Internationalisation of the Singaporean economy, and privatisation of its telecommunications industry followed. By 1998, it had the world’s highest penetration and teledensity rate for an emerging economy, with a decade-long history of 100% ISDN service (Tipton et al., 2003: 23). In 2001, the telephone density reached almost 120 per 100 people, three times that of Malaysia, and 22 times that of Viet Nam. The almost US$3 billion FDI that has resulted from this statedirected initiative, has boosted local service sector growth, and made Singapore into a regional telecommunications hub. Education, too has been a focus of investment, with spending on education representing 3.7% of GDP (OECD, 2003c; World Factbook, 2009a). (This compares, for example, with 3.5% for Japan, and 4.7% for Australia). Including its well-supported universities, this gives Singapore a firm educational base, and, like Malaysia, but with greater prospects of success, Singapore is fast becoming a regional educational hub. For the first time, for example, Singapore held major expos in India, in January of 2004. This ambition contends to a degree, with the persistence of significant unmet demand in higher education, and a correspondingly large volume of study abroad, and offshore enrolments by Singaporeans.

Anthony Welch 61

Singapore’s economy was a model of growth for more than two decades, averaging 8.3% growth in real terms throughout the 1980s, for example. Already by 1990, its per capita GDP was only outstripped by Brunei and Japan, in Asia. While GDP per capita was US$25,127 in 1996, this had fallen to US$20,611 in 1999, and remained at about that level, for some time, with 2002 figures of US$20,511 (ASEAN, 2009a). By 2008, however, it had reached US$51,600 (Worldfactbook, 2009). An unemployment rate of 10% in 1970, was brought down to 2.5% by 1980, and reduced even further, to 1.3% by 1990 (Selvaratnam, 1994: 13). Post-2000, however, the Singaporean economy experienced greater difficulties, in the wake of an international economic downturn. The downturn in Singapore was dramatic – from, a GDP growth rate of 9.9% in 2000, economic growth fell abruptly in 2001 to –2.37%, rising again to 2.25% in 2002. Most of the decline was however in manufacturing (which declined by 9.3%), while the service sector still managed to grow by 1.5%. Nonetheless, that was a sharp fall from service sector growth rates of 6.3% in year 2000. Unemployment rose to 4.5%, and by the end of 2001 as many as 25,000 workers were retrenched, including the highly skilled. This led to some gloomy internal assessments that Singapore was among the hardest hit Asian countries in the current worldwide economic downturn. Among other consequences, were cuts in public sector salaries (as in Hong Kong over the same period). After rising sharply for the years 2004–2007, the GFC led to a further fall in growth rates, to 1.1% in 2008. The economy contracted during the second half of 2008, and again in the first quarter of 2009, the latter falling by 11.5% year on year (World Factbook, 2009a; Nanyang 100, 2009a). Some trends were more positive: FDI more than tripled over the decade 1995–2005, from US$93 billion to US$311 billion (Singstat, 2007b: 1). The situation regarding trade with China, however, reveals a different story. China is Singapore’s seventh largest trading partner, its fourth largest export destination (if Hong Kong is included, it would be easily the largest), and third largest source of imports (World Factbook, 2009a). Bi-lateral trade rose by an average of 15% per annum over the 1990s. Given the significance of China as a trading partner for Singapore, it is no surprise to find that some 5,000 Singaporeans live and work in China, mostly in Shanghai. Moreover, China is Singapore’s largest recipient of foreign direct investment, accounting for 13% of Singapore’s overall FDI, Table 3.9 reveals. Overall, Singapore’s trading position in relation to China has remained positive. Exports to China rose from US$1.903 billion to US$16.140 billion from 1993–2001, while imports rose rather more modestly, from US$2.403

62 The Dragon, The Tiger Cubs and Higher Education Table 3.9 Singapore’s sites of foreign direct investment, 1997–2007, in SG$ millions Country (and rank)

1997

1998

1999

2000

2001

2003

2007

China (1)

10,477

12,186

14,296

15,710

16,542

19,816

39,294

8,908

8,610

8,517

9,754

10,413

13,592

21,159

Malaysia (4) USA (7)

2,905

3,064

4,197

6,187

6,580

8,058

13,508

UK (8)

7,678

3,276

3,387

4,903

5,768

7,354

31,210

177,949 209,650

230,060

257,314

301,157

625,799

Total Investment Abroad

158,566

(Singinvest, 1997–2001; Nanyang 100, 2009b)

billion to US$9.983 billion (ASEAN, 2009a). By 2005, Singapore’s exports to China of US$16.5 billion were balanced by imports from China of US$16.6 billion (Suite 101, 2006). In the context of a growing ASEANChina trade in services, Singapore is developing a reputation as a “destination of study” for Chinese students seeking to study abroad (ASEAN, 2001: 13), while growth in tourism has been strong in both directions. Nonetheless, as a small country, the proportion of Singaporean tourists to the total visiting China remains small, around 4%.

Viet Nam – Economy, society and trade with China Of the ASEAN Three, Viet Nam’s relationship with China has historically been the most problematic. Long a tributary state of China, the fact that the two are now officially sisters in socialism, and that each faces the dilemma of straddling the tensions between a socialist polity, and a developing market economy, has done much to paper over the historical cracks in their relationship. While Viet Nam’s long resistance to Chinese incursions helped define its strong sense of nationalism, it has also long emulated many aspects of Chinese culture, and now often sees China as a model for development. The traditional Confucian system of learning and selection for civil service was directly modelled on the Chinese, for example, and effectively persisted within the separate and parallel system of “native” administration established by the French colonial regime, until the 1920s (Tipton et al., 2003: 214; Welch, 2010a). Effectively under the heel of colonialism, or fighting for its independence for at least 100 years, Viet Nam has only been free of both since around 1990. As late as 1979, Viet Nam was involved in a

Anthony Welch 63

war of resistance to China, while contested efforts to depose the Khmer Rouge in Cambodia, and establish a friendlier regime, persisted until around 1990. China’s antipathy, re-fired by differences over Cambodia, meant that it was Vietnamese isolation, and a non-convertible currency, that provided a degree of shelter to Viet Nam during the regional financial crisis of the late 1990s. Nonetheless, FDI fell precipitously, and growth slowed. The resumption of diplomatic relations by the USA in 1995 precipitated significant, albeit interrupted, investment by US firms. FDI strengthened in the post-SARS environment. In 2001, some 400 US firms were estimated to have been registered in Viet Nam, by which time a bi-lateral Trade Agreement had just been concluded between the two states (Tipton et al., 2003). While Viet Nam’s aspiration for WTO membership matched that of China, its progress proved no less tortuous, and was only completed in early 2007. The GFC precipitated a fall of 29% in FDI to Viet Nam for the first five months of 2009, to US$2.8 billion (ASEAN, 2009e). The role of the Communist Party remains important, state capacity varies, and corruption remains a long-standing problem (Welch, 2007a, 2010a). Bickering between competing ministries is a long-standing problem, that weakens overall efficiency, including in education. Public dissent is not encouraged, although significant differences are voiced within the political regime, and society. North-South differences also persist, including in terms of both entrepreneurship and orientation to international affairs. Despite significant success in reducing poverty over the 1990s, overall Viet Nam has not managed the tensions inherent in developing a socialist market economy as successfully as its more powerful neighbour, whose success it closely observes. “A Senior official intimated that Hanoi is currently observing political and social changes in China as a model for Viet Nam to follow” (Cheow, 2004). In addition, the fact that an estimated 300,000 Vietnamese live in China (Nguyen, 2002: 403), creates further potential for increasing trade in services. Viet Nam’s total GDP rose from US$183 billion in 2002, to US$242 billion in 2008, with GDP per capital rising from US$2,250 to US$2,800, in PPP terms (World Factbook, 2009). Services occupy 39% of total GDP, slightly outweighing the proportion from industrial production. For countries bordering China, such as Viet Nam, the significance of its two-way trade (reaching over US$20 billion in two way terms in 2008) is all the more important, particularly since its GDP per capita remains well below the ASEAN average. However, while the ASEAN average per capita GDP fell in response to the Asian financial crisis of the late 1990s, from a level of US$1,504 in 1996, that of Viet Nam rose – from

64 The Dragon, The Tiger Cubs and Higher Education

US$337 in 1996 to US$439 in 2002 (ASEAN statistics, not in PPP terms). Notwithstanding historical difficulties, China and Viet Nam signed a Trade Agreement as long ago as 1992, and bi-lateral trade has grown steadily – for example, from US$691 million in 1995 to over US$1,400 million in 2000. For 2007, Vietnamese exports to China of US$1,795 billion were significantly outweighed by the value of Chinese imports at US$6,314 billion (Statistics of Vietnam International Trade Organization, 2009). By 2008, China was the third largest destination for Vietnamese exports and by far its largest source of imports (World Factbook, 2009b). This flow of goods and services has had a more significant effect on Viet Nam’s economy than on China’s – according to the Vietnamese Ministry of Trade, bi-lateral trade represented some 10% of Viet Nam’s total trade turnover, but only 0.4% of China’s (Phuong, 2001: 134). This only represents the “official” trade, however: informal trade and smuggling are both significant, and rising. Regrettably, ASEAN reports reveal no data on the trade in services (Phuong, 2001). Figures from the Vietnamese Ministry of Trade appear to reveal significant volatility in both exports to, and imports from, China (but the accuracy of social and economic data is undermined by the lack of overall standards for its collection). Given the sustained high rates of growth evident in both countries, however, the potential for trade to grow is great. Viet Nam’s main growth sectors are agriculture and manufacturing, but service sector growth exhibits real potential, especially its developing tourism industry. With the exception of 1999, the Vietnamese economy grew by more than 6.5% each year to 2003 (ASEAN, 2009a), and has remained healthy since, notwithstanding the GFC: the growth rate for 2003 was 7.3%, which the World Bank estimated as second only to China’s 7.8% (Cheow, 2004), and for 2005 was 7.5% (World Bank, 2005). GDP growth rate for 2008 was 6.2% (World Factbook, 2009b). Exports, which grew by 16.7% in 2003, reaching US$14.9 billion in the first nine months of that year, totalled US$62.7 billion for 2008, while imports totalled US$75.4 billion (World Factbook, 2009b). Recognising that in the post-WTO accession climate, the service sector market in China is set to grow vigorously, Viet Nam has argued that priority should be given to selected service sectors, such as tourism, which have significant growth potential. No additional cooperation is foreseen in the area of educational services, however. Just as with China, the national slogan today is “regional and international integration”, and Viet Nam’s accession to ASEAN membership in 1995 was followed by its hosting of the 5th Asia Europe Meeting in 2004, and of the APEC Summit in Ha Noi in 2006. The time is ripe for further integration of the neighbouring economies, including further collaboration in higher education.

Anthony Welch 65

The above section sketched the contours and developments in each of the national economies, including service sector trade where possible, and indicated the extent of trade between each of the tiger cubs and China. The following section focuses more directly on the higher education systems of China, followed by that of each of the tiger cubs. Attention is paid to current levels of trade in education services, and forms of educational collaboration.

Competitive challenges to Chinese higher education The scale of the Chinese higher education system is perhaps only matched by the size of the challenges that it currently confronts. With a population of around 1.3 billion, and an unquenchable thirst for higher education, the system faces real problems simply meeting domestic demand. In turn, ever-rising demand is placing government funds under greater pressure, to which it is finding it more difficult to respond. Quality is another challenge, with many universities slow to change from traditional patterns that are less and less appropriate in the modern era (Li, 2004). Equality of access and participation is yet a further problem, since both quality and quantity are very unevenly distributed across China, (as are other services). Maintaining local identity while responding to the challenge of internationalisation in higher education is a major dilemma for China (Zhang and Xu, 2000; Yang and Welch, 2001), that regional cooperation has the capacity to help address. Hong Kong (whose universities are very different to those described below), has performed something of this internationalisation function for years (Yang, 2002). Its universities have long had a significant record of internationalisation: of staff, albeit less so with students (Postiglione, 2005; Welch, 1997, 2004; Welch and Cai, 2010). The following section outlines these challenges and assesses their implications for regional cooperation. Quantity – Meeting the demand for higher education While the explosive enrolment growth of 20–35% in the years 1999–2004 (see Table 3.10), was not sustainable over the longer term, substantial expansion has continued. Nonetheless, supply is nonetheless still unable to fulfil demand. When rates of participation for higher education in OECD countries averaged 40%, and in some countries reached 50% (OECD, 2003c: 259), the equivalent rate in China is only about 20%, and very unequally distributed. Government plans for this rate to rise to 15% by 2015 were achieved years before the target date; nonetheless, competition for university places remains fierce, particularly for the elite

66 The Dragon, The Tiger Cubs and Higher Education

university sector, and many talented individuals miss out. Others study courses in which they have little or no interest, simply because they were fortunate to gain a place at all. Striking evidence of the substantial growth in student numbers and graduations is provided in the following table: Table 3.10

Number of public HEIs and enrolments, 1990–2006

Year

Number of institutions

New students

1990 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006

1,075 1,054 1,022 1,071 1,041 1,225 1,396 1,552 1,731 1,792 1,867

609,000 926,000 1,084,000 1,597,000 2,206,072 2,682,800 3,205,800 3,821,700 4,473,400 5,044,600 5,460,500

Graduates 614,000 805,000 930,000 848,000 949,767 1,036,300 1,337,300 1,877,500 2,391,200 3,068,000 3,774,700

Student enrolments

Percent increase

1,206,300 2,906,000 3,409,000 4,134,000 5,560,900 7,190,700 9,033,600 11,085,600 13,335,000 15,617,800 17,388,400

– 140.9% 17.3% 21.2% 34.5% 29.3% 25.6% 22.7% 20.3% 17.1% 11.3%

(Partly adapted from Yang and Ngok, 2004. 1990 to 1999 figures from China Statistical Yearbook 2000, Beijing, National Bureau of Statistics and Education Data http://www.edu.cn/jiao_yu_fa_zhan_498/ Later data from http://www.moe.edu.cn/edoas/website18/level2.jsp?tablename=1068

The relentless pressure for more places has strained state budgets significantly, and, as indicated below, led to some devolution of finances to the regional and local levels. One source indicated that state funding actually declined from 93.5% in 1990 to 50% in 2002 (Mok et al., 2009), a trend commonly lamented by university presidents. The proliferation of private Minban, or “People’s” universities, in recent years, is also related – in 2002, some 133 degree-granting institutions existed, with a total enrolment of 311,200 students, or in the order of 4.3% of regular public sector enrolments. Another 1,202 non-degree awarding Minban existed, with enrolments totalling 1,403,500. This had grown from a total of 85 Minban, only two of which were four-year HEIs that could award degrees, in 2001 (Huang, 2003a). By 2004, this had risen to 344 institutions and 540,000 enrolments (Mok et al., 2009: 507). By 2006, Minban enrolments had grown to 1.34 million, or 6.6% of enrolments, to which should be added another 1.47 million enrolled in Er Ji (second tier) institutions (7.3% of total enrolments) (Hayhoe and Lin, 2008: 6). The Law on

Anthony Welch 67

Private Education Promotion, that became operational in September 2003, underpinned the legal rights and interests of the schools, students and staff. It enshrined equal footing for Minban, as well as a reasonable return on investment: “private-school investors can get a reasonable repayment after deducting schooling costs and reserving development funds and other expenses” (WENR, 2003). Quality This element is related to the last, since as indicated above, the relentless pressure to squeeze more students into Chinese universities was not paralleled by an equivalent rise in numbers of institutions, or staff, or other resources. Indeed, rather the reverse, since the pressure has been to consolidate institutions, via mergers and amalgamations. The concerted pressures have resulted in a number of problems: sharply declining staff-student ratios being just one, as the following table reveals. Table 3.11 Year 1985 1990 1995 1998 2000 2001 2002 2003 2004 2005 2006

Changes in staff-student ratios, Chinese universities, 1985–2006 Student enrolment 1,703,000 2,063,000 2,906,000 3,409,000 5,560,900 7,190,700 9,033,600 11,085,600 13,335,000 15,617,800 17,388,400

FTE academic staff 344,000 395,000 401,000 407,000 462,772 531,900 618,400 724,700 858,400 965,800 1,076,000

Staff-student ratio 4.95 5.22 7.24 8.38 12.02 13.52 19.1 17.0 16.22 16.85 17.93

1985, 1990 data http://www.edu.cn/20010101/22284.shtml (Basic Statistics on Education). 1995 data http://www.edu.cn/jiao_yu_fa_zhan_498/1998–2006 data http://www.moe.edu.cn/edoas/website18/level2.jsp?tablename=1068 *Staff-student ratio from years 1998–2006 are adjusted figures, that take into account the teaching and supervision of graduate students and students in adult education.

World Bank data show the proportion of GDP spent on education as a whole in China to be still below 3% per year (World Bank, 2005), and some have raised doubts as to the feasibility of plans to raise it to 4% (Mok et al., 2009; Shen and Du, 2000). Together with the tidal wave of enrolments over the last decade, this resource-squeeze effectively exerts a downward pressure on quality, which is directly at odds with the expressed desire by both government, and Chinese universities, to attain

68 The Dragon, The Tiger Cubs and Higher Education

international levels of performance and attainment. (Despite this, it must be said that China’s persistent drive to increase its representation in major international citation indexes, is having an effect: using the measure of papers listed in Science Citation Index (SCI), China is now ranked third (after the USA and UK) (Welch, 2009; OECD, 2008b), while in 2008, China overtook the USA as leading contributor to Engineering Index (EI) (Cao, 2009a). Recent OECD data reveals a mixed picture – R&D spending increased by around 19% annually over the past decade, but while China now has the second largest number of researchers worldwide, their density is still low relative to OECD averages. Patent applications, which are doubling every two years, now account for 3% of the worldwide total, while its share of the world’s publications rose from 2.0% to 6.5% over the decade 1995–2004. Overall, however, imbalances, inadequacies and inefficiencies continue to constrain maximal development of innovation. A particular problem is the comparatively modest proportion that Chinese universities contribute to overall scientific innovation (OECD, 2008b). While relentless pressure is maintained to emulate the achievements of universities abroad, most particularly via more publications in English in these key scientific citation indexes – SCI, EI and Index to Scientific and Technical Proceedings (ISTP) – the international trend towards pressuring institutions to diversify their income sources nonetheless diverts energy away from the achievement of such targets. Moreover, if the argument is accepted that equality is a vital component of quality (Welch, 2000b), then this too provides a brake on the quality of the Chinese system. Institutions in the major and more developed cities, such as Beijing, Shanghai, Tianjin, Hangzhou and Guangzhou, are far more able to take advantage of reforms, thereby widening the gaps between themselves and their poorer or regional cousins. Equally, students from the less developed regions, or poorer provinces, are often denied the benefits of their peers in the major cities and coastal regions (Welch, 2010b). As elsewhere (Welch, 2004b), aging of the profession is also a particular problem, with almost 90% of PhD supervisors (a special honour, reserved for only a proportion of full professors) at MoE supervised universities being over the age of 56 (Zhang and Xu, 2000: 106). Indeed, the sheer enrolment demographics is itself posing a problem – the spectacular leap in both enrolments and graduations since 1999, is leading to what has been termed a “Professor Crunch”, particularly in the regions other than the booming eastern provinces (Xinhua News Agency, 2004). At the same time, significant resources are being concentrated on the designated “Project 211” universities. This scheme, operating since 1995, has seen something like 100 universities across the country receive a significant

Anthony Welch 69

injection of additional resources, in an effort to fast-track the development of an internationally competitive, and internationalised, network of top Chinese universities. (Once again, however, the more prestigious universities are awarded a much greater proportion of funds under this scheme than lesser institutions). Although the total of “Project 211” universities constitutes only some 10% of all HEIs, their enrolments at bachelors, masters and doctoral level comprise 32%, 69%, 84% of the national total respectively, while 72% of government-funded research programmes are carried out within designated 211 universities. Within 211 universities, 87% of teaching staff hold doctoral degrees, while 96% of state key labs and 85% of state key disciplines are sited in such universities. The more recent Project 985 has concentrated even more resources on a smaller number of selected key universities – some US$4 billion in around 40 top-tier institutions, most notably those such as Peking, Tsinghua, and Fudan. Efficiency Levels of internal efficiency within Chinese universities are not always high. Overall quality assurance systems are lacking, partly owing to the fact that administration of HEIs is split between several ministries (although this is currently changing). Internal administration is large and cumbersome. As in some other countries of Asia, modest levels of remuneration mean that significant “moonlighting” by academic staff occurs, with a consequent diversion of effort and efficiency from their home institution towards second or third jobs, or small business enterprises (Shen, 2000; cf. Welch, 2003). Attention is often re-directed towards such issues as housing, and accoutrements, rather than to the demands of the job (Yang, 2005b). Despite the high ratios of administrators to academic staff, there are numerous complaints that, too often, internal decisions are made on grounds of hierarchy (including often of administrative staff over academic staff), that may have little to do with efficient use of limited teaching and research time, and associated resources. Notwithstanding recent national campaigns, spreading corruption is a deepening problem (Mok et al., 2009). Characterised by one analyst as a “malignant tumour” (Yang, 2005b), it embraces areas such as entry scores, the award and administration of research grants, use of bribes and embezzlement to fund overseas study, English language testing fraud, plagiarism, the misuse of power, and a promotion system that often works more on patronage and guanxi (a cultural system based on relationship networks) than performance (Shen, 2000; Zhang, 2007; SCMP, 2005; Yang, 2005b; China Daily, 2009g; Mok et al., 2009).

70 The Dragon, The Tiger Cubs and Higher Education

Administrative reforms are often slow to be implemented, and widely resisted, provoking former Premier Zhu Rongzhi to remark, in a widely reported criticism, that universities were more like state-owned enterprises, than state-owned enterprises. Autonomy Notwithstanding significant devolution of authority over the past 15 years or so from the Ministry to provincial governments, notably in the 1993 reforms and the 1998 Higher Education law, academic autonomy is still restricted to a degree within China (Li, 2000). Even using the term autonomy in the Chinese sense demands some explanation – it is not uncommon to distinguish zhizhiquan (autonomy as independence in the political sense), from zhizhuquan (autonomy as mastery of the self). The former, used to refer to the autonomous status of China’s ethnic regions, also refers to the western sense of academic freedom (Zhong and Hayhoe, 2001). It is still a very delicate issue in China. Although provincial authorities have now been given more authority, for example over admissions policies, and are also now more responsible for institutional finances, institutional autonomy is also limited by the aforesaid dominance of non-academic staff over issues of teaching and research, and associated issues of resources. Despite the introduction of the President’s Responsibility System under the new law of 1998, criticisms persist by numbers of academics, of remaining state controls over universities, including approvals for new fields of study, stipulation of the curriculum, and course content (Shen, 2000). At the same time, Chinese universities are becoming part of a worldwide push for more performance data, justified under the name of accountability (Yang, 2005a; Welch, 2004a), but which also takes much time away from teaching and research functions, thereby in effect limiting academic autonomy. The practice of steering from a distance is also hitching Chinese universities, like those in other countries, to national economic agendas, ever more closely. In addition, the culture of academic freedom is not well entrenched in China, or even always well understood, either by university administrators, ministry officials, or at times, academics themselves (Shen, 2000; Qi and Chen, 2000). Finance In keeping with the difficulties alluded to above of declining central government support for the public sector, including higher education, and difficulties in simply accommodating the demand, measures to diversify funding sources have been introduced. Indeed, there seems

Anthony Welch 71

little choice, with the proportion of education funds to GNP falling from 2.21% in 1990 to 1.73% in 1997 (Shen and Du, 2000), although as seen in Table 3.8, this had risen to 3.5% by 2006. Funding diversification measures include enhanced local responsibility for funding (via taxes); increased fees (with some provision of scholarships for indigent scholars); donations; and an increase in university entrepreneurial activities, either as spin-offs from university research, via start-up companies, or via strategic partnerships with industry, including technology transfer. (There are ongoing criticisms, however, that at times the fruits of such start-ups fail to flow to the institutions, but are limited to a handful of staff, who are either associated with the original research, or in influential positions). The transformation of higher education funding has meant that in many institutions, student fees are a major source of income; perhaps as much as 15% of public institutional budgets, and as much as 90% of private institutions (Minban). Some reports indicate total earnings by the Minban sector to have been as high as 300 billion yen (US$36 billion) over the decade to 2003 (WENR, 2003). Tuition fees now often account for over 50% of many students” direct educational expenditures (Qi and Chen, 2000). Paralleling developments in East and South East Asia (Welch, 2003, 2004a, 2009, 2011; Tipton et al., 2003), the introduction of fee-based extension courses into Chinese universities, at evenings and weekends (often with lower entry standards), has been a common resort, justified in large part on financial grounds. The effects on equity are seen in estimates that over the past two decades, tuition fees in higher education increased by 30-fold; an average tuition fee of 200 yuan per student in 1986 to about 6,000 yuan in 2006. In effect, a student would need to pay around 7,000 yuan per year for higher education, or about 35 times the annual wage of a farmer (Mok et al., 2009). In this context, it is no surprise that parents increasingly lament the rising costs of higher education, with one recent survey indicating that 70% of Heilongjiang parents found it difficult to bear such costs (China Daily, 2009i). Internationalisation – Cooperation and/or competition Regional internationalisation has the capacity to respond to some of these challenges, at least in part. It can reduce the costs to the state, although not always to the individual student. In some respects it also has the capacity to reduce the oft-expressed concerns by Chinese academics that internationalisation and westernisation are in fact conflated, by offering more localised responses to the debate over internationalisation versus indigenisation (Zhang and Xu, 2000; Yang, 2000; Welch,

72 The Dragon, The Tiger Cubs and Higher Education

2000a). Such regional responses are not entirely new – as indicated above, for years, Hong Kong had acted as an important bridge between China and the rest of the world, including in higher education (Yang, 2002). The effectiveness of regional strategies however, is limited in practice by at least three specific elements. One is the unshakeable conviction of most university administrators, and most students, that the US system represents the sole source of institutional reforms, and quality higher education. Although often based on very inadequate information, in practice it restricts internationalisation options. A second lies to some extent within the control of the Ministry of Education, who formally invite “foreign experts” to Chinese universities, and the China Scholarship Council, who in 2005, for example, announced a scheme to send 5,000 scholars abroad each year, for research or to gain doctoral degrees (China Daily, 2005). The third is that of brain-drain, where, for example, it has been estimated that of the total of 930,000 Chinese students who travelled abroad to study since 1978 (many sent and subsidised by the state), only about 230,000 have returned (China Daily, 2006; Cao, 2004; Zweig, 2005; Welch and Zhang, 2005, 2008; Zhang and Li, 2002). By 2010, the number of Chinese studying abroad is forecast to reach 200,000 (China Daily, 2006), but the return-rate is rising, as more opportunities open up in a dynamic China. Zhang cites figures showing that of a purported 40,000+ Chinese students studying abroad in 2000 (2,800 of whom were supported by the government, 3,900 by their Danwei, or work unit, and some 32,000 self-supported), about half would return (Zhang, 2002: 187). By 2007, 140,000 Chinese students were studying abroad, with around 44,000 returning (Welch, 2009: 11). Certainly, return rates are higher than even a decade ago, and supports the thrust of ILO research, that inter alia, confirms, “… rapid economic Figure 3.2

Chinese students studying abroad and returning, 1997–2007

140000

Number

120000 100000 80000 60000 40000 20000 0 1997

1998

1999

2000

2001

(Source: National Bureau of Statistics, 2008)

2002 Year

2003

2004

2005

2006

2007

Anthony Welch 73

growth makes a destination more attractive to both non-nationals and returning nationals” (ILO, 2003: 71). Here too, regional collaboration may offer at least a partial solution, and the Chinese government is now actively interested in deploying its sizable knowledge diaspora, in the service of national scientific and economic development (Cao, 2004, 2006; Zweig and Chen, 1995; Zweig, 2005; Welch, 2007c; Welch and Zhang, 2005, 2008a and b; Welch, 2009; Welch and Cai, 2010). It should be pointed out here, however, that Chinese statistics are not always collected in a consistent manner, often across different agencies and ministries. This is a particular problem with MoE statistics on study abroad, which often failed to account for the growing number of selfsupported (private) students abroad. Nonetheless, Table 3.12 reveals the numbers and return rates of Chinese students studying abroad in different categories. Table 3.12

Chinese students studying abroad, by category, 1997–2000

Year

Government supported

Danwei supported

Self-supported (and % of total)

Total

1,906 2,000 2,000 2,228

2,442 3,000 3,000 2,724

30,731 (87.6) 50,000 (90.9) 80,000 (94.1) 80,000 (94.1)

35,079 55,000 85,000 85,000

1997 1998 1999 2000

(Adapted from Zhang and Li, 2002)

Figures based on visas, as in Table 3.13, rather than MoE statistics, show self-financed students assuming a much larger proportion of the total number of Chinese students studying abroad, than in earlier years. The estimated total of Chinese students studying abroad in 2007 was 140,000, although this is probably conservative, while the same figures show 44,000 returnees (a return rate of 31.4%) (Cai, 2008; Welch and Cai, 2010; Welch, 2009). Importantly, trade in educational services is also expanding rapidly in the reverse direction. The significant and rising tide of international students, in 2002, with a record 85,829 international enrolments from 175 countries at Chinese universities, brought both an increase in direct cross-cultural exchange, and a welcome and much-needed boost to numerous institutions’ bottom lines. This total rose to 110,844 enrolments from a total of 178 countries in 2004, and now totals more than 220,000. Based on assumed average annual tuition fees of US$3,000 per student, plus

74 The Dragon, The Tiger Cubs and Higher Education

at least a further US$2,000 for accommodation, this would total US$1 billion, without allowing for associated, additional expenses (although it should be pointed out that by no means all students enrol for an entire year). It must be said, however, that both source countries and income, are very unequally distributed, with perhaps 60% or more of students sourced from East Asia (South Korea and Japan), and most of the enrolments occurring in larger and more well-known institutions and regions. Beijing enrolled the most foreign students, followed by the municipalities of Shanghai and Tianjin; other significant provinces included Jiangsu, Liaoning, Shandong, Jilin Guangdong, and Heilongjiang (Beijing Morning Post, 2004). Of all international enrolments, 93% (or almost 80,000) were self-supporting. The Ministry of Education is reportedly developing regulations to help provide work-study opportunities, such as part-time jobs. Underlining the point regarding the regional character of internationalisation (listed above), 77% of all international enrolments in Chinese universities in 2002 were from Asia (especially Japan and South Korea), 10% each from the Americas and Europe, 2% from Africa and 1% from Oceania. South Korea, Japan, the United States, Indonesia and Viet Nam were the top five sending nations, accounting for more than half of all overseas students in China. While it is not possible to draw long-term inferences from a relatively short-time series, Table 3.13 reveals healthy and rising enrolments in Chinese universities, including from Malaysia, Singapore and especially Viet Nam. China is also generous with scholarships, having provided 5,362 scholarships to overseas students from 148 countries to study at its universities in 2000, and 5,841 from 155 countries in 2001 (China Education Yearbook, Table 3.13

ASEAN students in Chinese universities, 2000–2006

ASEAN students

2000

2001

2002

2003

2004

2005

2006

– Indonesia – Malaysia – Singapore – Thailand – Viet Nam – Philippines

1,947 < 500 854 667 647 –

1,697 632 < 500 860 1,170 –

2,900 840 583 1,737 2,300 638

2,563 841 551 1,554 3,487 602

3,750 1,241 929 2,371 4,382 1,375

4,616 1,589 1,322 3,594 5,842 2,176

5,652 1,743 1,392 5,522 7,310 1,512

ASEAN total

4,610

4,854

na

na

na

na

na

Total International

52,150

61,869

85,829

77,715

110,844

141,087

162,695

ASEAN % of total

8.84%

7.85%

–

–

–

–

–

(China Education Yearbook 2001–2007) (NB. for statistical purposes a number of 495 was assigned for instances of <500).

Anthony Welch 75

2002). Asia and three-country data for 2003–2004 and 2004–2005 are presented in Table 3.14, and reveal a strong bias towards less developed nations, as would be expected. Table 3.14 2004–2005

University scholarships offered by China, 2003–2004, and

2003–2004

% of total

2004–2005*

% of total*

Asia Total – to Malaysia – to Singapore – to Viet Nam

2,115 10 10 130

45.0 0.21 0.21 2.7

2,101 10 10 130

38.6% 0.18 0.18 2.39

Overall total

4,695

5,437

China Scholarship Council 2004 (private communication). * projected

Other pertinent developments include the recent mandating of foreign language instruction (mostly English) for something like 10% of subjects at major Chinese universities, including use of imported foreign language textbooks. This even extends to some subjects like law and the social sciences, and was scheduled (with no doubt some difficulties) to be extended to even provincial universities over the succeeding five years or so (Huang, 2003b: 234). Incentive schemes, offering special salaries, assistance with housing and help with schooling for children, have also been introduced, to entice Chinese scholars back from overseas – again however, largely by wealthier and elite institutions (Welch and Cai, 2010). Last but not least, China recently announced plans to introduce a “Green Card” system in 2004 that will afford highly-skilled foreign workerslong-term residence permits (Japan Times, 2004). This will no doubt be of interest to the small but growing number of foreign appointees who now occupy senior posts at some of China’s major universities. (As an example, Professor Gavriel Salvendy was appointed some years ago as the first foreign Chair Professor and Head of Department – of Industrial Engineering – since 1949 at Tsing Hua, at a salary of US$100,000 p.a. His contract specified that he would work there some months each year, while allowing him to retain his post at Purdue University). Nonetheless, restrictions on transnational education persist – notably limits to the teaching of humanities and social sciences, and a ban on the teaching of religion (Huang, 2003a and b). In common with other forms of private higher education, the Chinese Ministry divides transnational higher education (Zhongwai Hezuo Banxue) into degree, and non-degree categories. Regulations passed in late 2003

76 The Dragon, The Tiger Cubs and Higher Education

and aimed at encouraging partnerships between Chinese HEIs and foreign institutions (OECD, 2003c), largely echo procedures established in 1995, that insisted on reputable partners, detailed documentation, a Board comprised at least 50% by Chinese citizens, and a Chinese director (Huang, 2003a and b). These seem not to be entirely consistent with the spirit of China’s WTO commitments in 2001, but can be subject to local influence and interpretation. China’s horizontal commitments specified that the establishment of wholly-owned foreign enterprises, and joint ventures was to be unbound, although profit making was excluded. As elsewhere in Asia, definitions of profit were not entirely clear. The commitment did, however, indicate that relevant legislation was still “under formulation” (WTO, 2001b). Educational commitments stated that the provision of educational services was unbound, and that, for example, “joint schools … with foreign majority ownership” were permitted (WTO, 2001b). Official regulations promulgated in March 2003 voiced concerns as to quality, and contained explicit procedures to deal with foreign partnership HEIs that were seen to fall short of requirements: Institutions of Chinese-foreign cooperative education in which chaotic management and poor quality education and teaching have resulted in odious effects shall be ordered either by the departments of educational administration or by the departments of labor administration, depending on their division of duties, to conduct overhauling within a set time limit, and shall be placed on public notice. Where the circumstances are grave, or if overhauling is not done when the time limit expires, or if the overhauling fails to meet requirements, either the departments of educational administration or the departments of labor administration, depending on their division duties, shall order them to stop recruiting students and shall cancel their permits of joint Chinese-foreign cooperative education (Article 56) (Ministry of Education, nd). Notwithstanding strict regulations, it has been estimated that, by the end of 2002, more than 600 Chinese HEIs had engaged in some form of transnational higher education (Huang, 2003a). Many were with regional HEIs, with some 146 listed by the Ministry as being with Australian partners, 58 with Japan, 56 with Hong Kong, 46 with Singapore (see below), and 31 with Taiwan (OECD, 2003c: 43). By June 2004, this had increased to 745, of which 169 programmes were deemed qualified to award overseas degrees (including Hong Kong) (Yang, 2008: 276). Partnerships with regional universities, especially those more integrated into the inter-

Anthony Welch 77

national knowledge network, such has long been the case with Hong Kong institutions, have the capacity to allow access to higher education to a larger proportion of the population. Increasingly, this does not mean that the individuals need to leave home – distance education using the range of ICT forms that now sustain virtual teaching and learning in higher education is growing swiftly while still providing access to new and relevant knowledge. As is argued below, however, the most common forms of internationalisation are business and IT courses. This is no less the case in China, where it has been estimated that half of all such programmes lead to an MBA (Huang, 2003a), while significant international partnerships with major overseas HEIs are in practice limited to wealthier and more developed domestic partners – “Almost all joint programmes are provided in China’s most prestigious universities” (Huang, 2003a; Yang, 2002). While earlier ventures were largely with US institutions, there is an evident trend towards more regional initiatives, notably with Hong Kong and Australia, which for example, listed some 200 offshore programmes in China (Yang, 2008: 276).

Existing China – ASEAN relations in higher education As one of the more substantial changes in higher education, globalisation underlines the fact that we can no longer understand systems of education sufficiently, or indeed international forms of competition and collaboration, using the unit of analysis of the nation state. Regional and global consortia are now a notable feature of the higher education architecture. They exhibit much the same strengths and weaknesses as institutional forms of collaboration. Some are weaker, others stronger. Some persist, others disappear. Some embody limited ambitions, others are global in ambition as well as reach. ASEAN-China trade in services is not well understood, or sufficiently researched (see the Conclusion to this analysis). Tourism by Chinese citizens in ASEAN is known to be large and growing, while Singapore is increasingly seen as “a destination of study and business tours” (ASEAN, 2001: 13). In 2008, 950,000 Chinese tourists travelled to Malaysia, for example (China Daily, 2009i). Further cooperative endeavours will lead to increased flows of investment, including in areas such as educational services. However there is some concern among ASEAN members, keen to take advantage of prospects for expanded service sector trade with China, that some non-tariff restrictions prevent further development of the China market, including in educational services.

78 The Dragon, The Tiger Cubs and Higher Education

Cultural relations The promotion of cultural ties between China and ASEAN, an element within overall ASEAN cultural policy, was inaugurated by an ASEAN+3 Meeting of Ministers Responsible for Culture and Arts (AMCA+3), in Kuala Lumpur in October 2003, and separately endorsed by the ASEAN+ China Summit, which met at Bali in October 2003. The latter pledged to intensify cooperation in key areas, including education and human resource development, and exchange of relevant personnel. In this sense, it broadly functions within the expressed goals of the ASEAN Socio-Cultural Community: to “nurture talent and promote interaction among ASEAN scholars, writers, artists and media practitioners, to help preserve and promote ASEAN’s diverse cultural heritage while fostering regional identity, as well as cultivating people’s awareness of ASEAN”, (ASEAN, Culture and Information [nd]) although details of the ASEAN China guidelines remain to be developed. Following the development of the ASEAN+3 E-Workplan in 2007, that included an education component, ASEAN+3 Meetings in Phuket Thailand in March 2009 clarified priorities such as academic cooperation and mobility, and building East Asian Studies (Workplan, 2007; ASEAN, 2009f). As seen below, while there is enthusiasm on both sides to strengthen relations in higher education, this is not always simple. Trade agreements and consortia At least one regional trade agreement includes cross-border education, while three principal higher educational consortia exist, that are either targeted at promoting ties with China, or that already include Chinese universities as members. APEC From its inception, the Asia Pacific Economic Cooperation (APEC) has included an education component. Originally formed as the APEC Education Forum in 1988, it now fits within the APEC Human Resources Development Working Group, which includes China, Malaysia, Singapore and Viet Nam, as well as a number of other countries. While APEC infrastructure to support regional initiatives in education has been modest, its aims are not. Its ambitions include, notably, the attainment of free trade and investment within the Asia-Pacific region for developed countries by 2010, and for developing countries by 2020. A relevant instrument consists of an inter-governmental consultative group, the APEC Education Forum (now called EDNET), while the Human Resource Development Working Group (HRDWG) has somewhat wider aims,

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embracing lifelong learning, and capacity development, but also sustainable development, and labour and social protection). University Mobility in Asia and the Pacific (UMAP), which is seen by APEC as a vehicle to promoting its “people-to-people” links in education, organises one and two semester study abroad programmes for undergraduates. Members include Singapore, Malaysia (the Chair for 2003–2004) and Viet Nam, while China’s membership, discussed again at a UMAP meeting in Japan in March 2003, was subsequently confirmed, notwithstanding difficulties arising from already having Taiwan as a member. A further policy and research symposium on competencies and skills was held in Xian in January 2008. Current activities consist of the further development of the existing Pilot Scheme on Credit Transfer (UCTS), while seeking to leverage the comparative advantage of member states. A project on Qualifications Frameworks in the APEC region, and regional language learning are further priorities: Learning each other’s languages is critical because we now live in a global economy. Being able to speak others’ languages and communicate in culturally sensitive ways is necessary for trade and other forms of international exchange (APEC, 2008). An APEC publication (APEC, 2001) focused specifically on identification of barriers to trade in cross-border educational services, as well as measures to promote it, and included considerations of access and equity, and the integrity of national systems. While measures affecting crossborder exchange and investment in higher education, is listed as a current APEC initiative, there are few signs of concrete achievements (APEC, 2009). More than one country within the region voiced its concern on this latter issue, noting the necessity to “retain the … sovereign right to determine the … domestic funding and regulatory policies/ measures” (OECD, 2003b: 51), as well as the integrity of the public system and local standards. Lack of regulatory transparency was also raised as another issue within the document, and has been raised by some regional economies, as potential barriers to the export of services into China, despite its accession to WTO membership (see Appendix for full list of APEC Education Network member countries). The three regional consortia in higher education are as follows: 1. The ASEAN Universities Network (AUN), which in 2001 inaugurated the ASEAN-China Academic Cooperation and Exchange Programme. Members include University Sains Malaysia (USM), University Malaya

80 The Dragon, The Tiger Cubs and Higher Education

(UM), National University of Singapore (NUS), and Nanyang Technological University (NTU). Its activities include the ASEAN-China Rectors Conference, Roundtable, Joint Research and Training Grants as well as ASEAN-China Distinguished Professors and Lecturers Exchange Programme. One of the first actions taken was an ASEAN-China Rectors meeting at Chulalongkorn University, Bangkok, in June 2002, where it was decided to explore current circumstances and the interests in extending relations, via a survey of members, including prospects for virtual courses. The next roundtable, scheduled for March 2004, at the Beijing Foreign Languages University, was to take further steps to advance ASEAN-China collaboration. Marine Science was selected as an initial vehicle for the implementation of Joint Research and Training Grants, on the basis of reciprocal advantage. Chinese scientists from the nation’s most eminent national university in the field, Qingdao Maritime University, were to be afforded opportunities to conduct research in tropical and equatorial water environments, while ASEAN scientists were to be enabled to take advantage of the temperate water environment offered by Northeastern China. Ten researchers were to be selected from each side to receive three-monthly grants, for the conduct of maritime research. This framework agreement on research cooperation was confirmed at the Ha Noi meeting in March 2007, where another Memorandum of Understanding (MoU) was signed. In 2009, it was agreed to establish an ASEAN+3 university network, that would foster annual meetings of ASEAN+3 Rectors and Heads of International Offices, encourage collaboration in key academic fields including ASEAN and East Asian Studies, and expand both staff and student mobility (ASEAN, 2009f). ASEAN+3 governments promised financial support to implement these initiatives. Another element of the Agreement included a Joint Training activity, whereby some 40 academics from ASEAN and China were to be selected for two training courses, each of a fortnight’s duration. One training course was to be held within ASEAN, and another in China. The final component was the ASEAN-China Distinguished Professors and Lecturers Exchange Programme, aimed at strengthening relations between ASEAN and Chinese scholars by promoting short-term academic exchanges (two weeks to one month). Exchange activities were to embrace lectures, laboratory exercises and demonstrations, research student advisement, and collaborative development of curricular and teaching-learning materials on both sides (For a full list of AUN member institutions, see the Appendix). 2. The second existing higher education consortium that involves member universities in China and ASEAN is the Association of Pacific

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Rim Universities (APRU) consisting of 42 leading research universities from Singapore (NUS), China, Malaysia (UM), as well as the USA, Australia, Chile, Chinese Taipei, Philippines, Thailand, New Zealand, Russia, Japan, Korea and Canada. Member universities from China number among its leading research institutions: Peking University, Fudan University, Nanjing University, Hong Kong University of Science and Technology, Hong Kong University, Tsinghua University, and Zhejiang University. A key APRU activity is to gather information about the extent of internationalisation activities at member universities, but at the time of writing this data was not yet available. (For a full list of APRU member institutions, see the Appendix). 3. The third consortium is UNIVERSITAS 21, which includes three major Chinese universities (Shanghai Jiaotong, Fudan, and the University of Hong Kong), as well as major research universities from Canada, Australia, the UK, India, the USA, Sweden, Germany, New Zealand, Singapore (NUS), and Sweden. UNIVERSITAS 21 Global is an e-University, of the 21 universities plus Thomson Learning (a large, multinational corporate training provider) – it offers an MBA programme, for example, headquartered in Singapore, and offers courses in Mandarin. Opening for business in May 2003, its online MBA claimed chat-rooms, threaded discussions, and other such web-based tools, and advertises that an MBA can be gained at a fee level that begins from US$10,000. By 2008, 135 MBAs had graduated from the programme. (A full list of UNIVERSITAS 21 members is found in the Appendix). The following section presents an overview of the higher education system of each of the three tiger cubs, with analysis of the character and extent of trade and partnership with China in the higher education sector. Where possible, it illustrates institutional linkages, and joint programmes. Although at one level the most substantive form of collaboration and competition, these can also be the most labile, and sometimes difficult to trace and detail. This is for a range of reasons. Firstly, institutions are often coy about giving out details, which may be seen as commercial and confidential. A second reason for coyness, is that MoUs may often be far less active and substantial than advertised. Inter-institutional MoUs are common; much less frequent are longstanding and substantive programmes of collaboration that yield benefits to both parties. (This is also the case, of course, with international higher education consortia, where for example, membership of UNIVERSITAS 21 has not remained stable, and internal disquiet, including over its actual benefits, persists at some campuses). In practice, institutional linkages vary, with some more active than others. Many Chinese universities, for example, tout

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widespread connections with major overseas universities. More detailed investigations within the institutions may reveal that the impressive list of partner institutions is more aspirational than actual. Singapore Singapore’s position as a major provider of regional educational services is a heady mix of ambition and accomplishment. Originally based on the British model, the higher education system is highly structured, and integrated into national development goals, and strategies. The original institution, the University of Singapore incorporated the original Nanyang University in 1980, becoming the National University of Singapore (NUS). University enrolments grew from 9,200 in 1980 to more than 25,307 by 1990, while enrolments at the more vocationally-oriented polytechnics grew from 11,105 to 29,484 over the same period (Selvaratnam, 1994: 35). NUS was joined by the newly upgraded Nanyang Technological University (NTU), formerly the Nanyang Technological Institute, in 1991. The Singapore Management University, incorporated as a private company in 2000, became Singapore’s first private university, (albeit continuing to receive significant government funding), while the Singapore Institute of Management was accredited to grant degrees from 2006. It was fully private (Tan, 2008). While a total of 5,935 students graduated in 2008, inadequate domestic capacity still meant that significant numbers of Singaporeans travelled abroad to study, while offshore enrolments are also on the rise. (At the same time, notwithstanding intense domestic pressure for places, Singapore provided 15%+ of its places for international students, to ensure that “tertiary institutions within the country do not degenerate into parochial institutions … The government’s policy is that this is the price that Singapore has to pay for diversity” (Selvaratnam, 1994: 42). Table 3.15 shows the principal destinations

Table 3.15 Numbers and destinations of Singaporeans studying overseas, 1981–1990 (self-financed) Country

1981

1983

1987

1990

USA UK Australia Canada Total

1,840 1,447 771 961 5,019

4,500 776 638 1,111 7,025

4,870 1,782 895 1,101 8,648

4,460 2,220 1,921 1,572 10,173

(Adapted from Selvaratnam, 1994: 48)

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of Singaporeans who, unable to gain entry to local institutions, or to gain one of the wide range of scholarships (mostly tenable at UK universities), financed their own study abroad, during the 1980s. Table 3.15 shows that the number of Singaporeans studying abroad roughly doubled over the 1980s, while the balance shifted somewhat, away from the USA, and to a lesser extent the UK, towards a more balanced, and to a lesser extent, more regional, distribution. The trend towards a slightly rising share of overall enrolments going to Australia, is supported by other studies of student destinations of the period (Shinn et al., 1999; Welch, 2002), and largely predates the much faster growth in international enrolments at Australian universities of the past decade or so. External enrolments (of Singaporeans studying for an overseas qualification) outnumber Singaporeans studying at domestic institutions. Figures for 2005 show that 80,200 Singaporeans enrolled in programmes offered by overseas providers (Tan, 2008). With US$8 billion allocated to R&D from 2006–2010 (Sidhu, 2008: 22), Singapore has clear aspirations to become a regional education hub, and its Global Schoolhouse is attracting more and more students from the region to its universities, and providing services internationally. This includes attracting branch campuses, some of which, as seen below, have proved more enduring than others. Prospects for growth in service sector trade, are supported, inter alia, by educational data, showing a highlyeducated populace. Proportions of the population aged 25 and over with a secondary or higher qualification rose from 37% in 1990 to 55% in 2000, while university graduate numbers more than tripled over the same period – from 77,000 to 249,000. This now constitutes 12% of the population aged over 25 years. Current targets are for foreign undergraduate enrolments to reach 20% of the total. The Singapore Cooperation Programme offers technical training to developing countries, either bilaterally, or in cooperation with third countries or multilateral organisations. Singapore is also a generous provider of scholarships to international students, including from ASEAN nations. Singapore’s Ministry of Education offers scholarships to citizens of ASEAN countries, for undergraduate studies in Singapore, while organisations such as the Singapore International Foundation, Association of Nanyang University Graduates and the Singapore Chinese Chamber of Commerce provide yet more (Yap, 2003: 371). Many statutory boards, local companies, and multinational companies also offer their own scholarships. Some of these impose a bond with the organisation upon graduation. In 2005, higher education enrolments totalled 105,424, comprising 43,663 from universities, 58,880 from Polytechnics and 2,881 in Teacher

84 The Dragon, The Tiger Cubs and Higher Education

Education (Tan, 2008: 25). Domestic postgraduate enrolments have risen swiftly, from 2,400 in 1990 to 14,200 in 2002, and 17,059 in 2007. Of overall university enrolments of 50,904 in 2008, graduate enrolments numbered 11,472 (Singstat, 2009). Of these, about half are now enrolled full time (Singstat, 2003, 2007a). In addition, a significant number of Singaporeans are enrolled in degrees from overseas universities, with about 55% of the overseas enrolment enrolled in UK universities, and 40% in Australian, in 1998. The largest UK providers are the Open University and the University of London, while major Australian providers include RMIT, Monash and Curtin. Tables 3.16a and 3.16b show the numbers of undergraduate and graduate enrolments, including proportions of enrolments that were domestic and international. Table 3.16a 1997–2000

Undergraduate enrolments and graduations, local and external,

Enrolments

Graduates

Year

External

Local

E:L Ratio

External

Local

E:L Ratio

1997 1998 1999 2000

13,990 18,000 19,330 21,010

31,730 33,090 35,100 37,650

44 54 55 56

2,600 3,390 4,270 5,350

8,680 9,330 9,460 9,410

30 36 50 57

(Singstat, 2001)

Table 3.16b 1998–2000

Postgraduate enrolments and graduations, local and external,

Enrolments

Graduates

Year

External

Local

E:L Ratio

External

Local

E:L Ratio

1998 1999 2000

4,420 6,120 6,250

10,240 12,760 12,770

43 48 49

890 2,150 2,330

2,170 2,590 3,680

41 83 63

(Singstat, 2001)

Evidently, the growth in external enrolments was significantly greater than for local. Although later statistics were not available, it is likely that Singapore is no longer a nett importer of educational services. Whereas cross-border delivery via distance (including online) programmes requires no Ministry approval, local presence using a domestic (Singapore) partner, does (Ziguras, 2003).

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With a total population of only 4.6 million (smaller than many of China’s cities), Singapore has long been a nett importer of educational services. More recently, however, its ambitious plans to become a regional “eduhub”, have been matched by investments in key domestic initiatives, including bio-medical research facilities, artificial intelligence and robotics, lasers, and ICTs (Tan, 2008), a well-funded centre for research into pedagogy, and the recently-established Lee Kuan Yew School of Public Policy (at NUS). While its domestic higher education system is a heady mix of ambition and accomplishment, inadequate domestic capacity has long meant that significant numbers of Singaporeans have travelled abroad to study, while offshore enrolments are also on the rise. At the same time, notwithstanding intense domestic pressure for places, Singapore provided over 15% of its places for international students, to ensure that “tertiary institutions within the country do not degenerate into parochial institutions …” (Selvaratnam, 1994: 42). Singapore’s expressed aspirations to become a regional education hub (“the Boston of the East”) attracting more and more students from the region to its universities, and providing services internationally which have met with somewhat mixed success. Singapore’s aim to establish itself as a “Global Schoolhouse” over a decade ago, included offering generous salary packages and substantial research support to lure expatriate staff. Successes have included attracting some 15 foreign institutions (from China, the USA, France, Germany, India and the Netherlands) to establish a presence in Singapore over the past decade, such as France’s INSEAD and the University of Chicago’s Graduate School of Business. International enrolments, too, have grown, with total transnational enrolments for 2004 comprising over 80,000 students, or 36% of all enrolments (Gribble and McBurnie, 2007). In 2008, NTU, NUS and Singapore University of Management (SUM) all reported that 20% of their enrolments were international but government regulations precluded any breakdown of international enrolments by country (Asiaone, 2008). At the same time, however, not all such ventures have endured – a bio-medical research facility of the USbased Johns Hopkins University, established in 1998, closed in 2006, while the first fully-owned and operated foreign campus, opened by the University of New South Wales (Australia) with great fanfare, closed only months later, due to weak enrolments. The UK’s Warwick University abandoned plans to establish a campus, “amid staff concerns about possible limitations on academic freedom in Singapore” (Tan, 2008: 19).

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Singapore-China trade and collaboration in higher education At least five firm planks provide a solid platform for trade and other kinds of collaboration in educational services between Singapore and China. The first is linguistic and cultural affinity. In multi-ethnic Singapore, about three-quarters of the total population and over 90% of its university students are ethnic Chinese (Tan, 2008). Of the Chinese speakers, more than one million, or over 42% speak Hokkien, while the next largest group are Teochew, who add a further 21%. A further 15% of Singaporeans speak Cantonese (Singstat, 2001). Thus there is a firm base in linguistic groups that understand forms of Chinese, and in practice, many Singaporeans speak Mandarin/Putonghua. The second plank is provided by the strong commercial connections between Singapore and China, as noted above. The third is Singapore’s strong regional presence in service sector trade. It has “… a long tradition as a provider of trading and financial services in the region, and business and related entrepreneurial activities” (Selvaratnam, 1994: 15). This notably includes an explicit intention to become a regional education hub, attracting increasing numbers of international students to its universities. It also attracts significant numbers of academic staff (to whom permanent residence may be offered), notably from China (Tan, 2008). Currently, it attracts significant enrolments, largely from the region. Among the major source countries are China, India, Viet Nam, Indonesia and Malaysia (OECD, 2003c; Asiaone, 2008); but Singapore has wider ambitions. China is certainly a major current priority for Singapore’s universities: “A main recruitment target … of these students is the PRC. Singapore government scholarships (are) being awarded at the undergraduate level to students from this country” (Tan, 2008: 13). Fourthly, as indicated above, Singapore makes a good number of its scholarships available to international students, including those from beyond ASEAN. Fifthly, Singapore and China concluded a specific MoU on 29 May 2002, signed by the respective Ministries of Education. Given this solid platform, comprising trade, cultural and linguistic affinity, and educational agreement, a solid degree of collaboration in the arena of educational services was to be expected. Beginning in 1999, the two Ministries of Education committed to an MoU, which led to exchanges between teachers, scholars, researchers and students. Subsequent expansion in such visits between the two countries was followed by a further MoU, signed in May 2002, that formalised an exchange programme for outstanding students from each country. Scheduled to begin in 2003, it offered 50 students from each country, a 15-day exchange, and was organised with the support of the respective

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national youth organisations – the National Youth Council of Singapore, and the All China Youth Federation (MICA Press release, 2002). An explicit aim of the exchange programme is to broaden bilateral ties between China and Singapore, and to foster understanding, collaboration and bonding between students from Singapore and People’s Republic of China (PRC) students. The Chinese universities involved were the Beijing Language University, Beijing Post and Communication University, Beijing University for Foreign Studies, and Tsinghua University. It is also important to recognise, however, that Chinese linguistic and cultural affinity is no guarantee of success in China, as Singapore discovered in its ill-fated venture in Suzhou. Its early attempt to develop a high-tech Science Park in Suzhou, China, based upon Chairman Deng’s intriguing assessment (after visiting in 1979) that Singapore was an example of Socialism, (albeit operating in a capitalist context), and Lee Kuan Yew’s equally mistaken assumption that he could parlay a personal relationship with Deng, and Singapore’s linguistic and cultural affinity with China, into favourable investment projects, proved to be an object lesson in how not to do deals in China – a disaster, with annual losses to Singapore at one stage totalling US$24 million (Pereira, 2003; Ross, 2006). Singapore’s failure left it badly singed, involving not merely money, but a considerable loss of face, and a lesson in differences over what constituted a contract. To this day, the subject is rarely discussed openly (especially not in front of foreigners), in Singapore. Nonetheless, Singapore’s painful experience has not halted further China partnerships in higher education, which are now strong. In this context, it is no great surprise to find (as the analysis below confirms) that of all three tiger cubs, Singapore’s relations with China in the higher education sector were found to be by far the strongest, and most sophisticated. Its universities are the most developed of all three, its service sector trade is the largest and most developed, its ITC infrastructure world-leading, and its Chinese ethnicity, and Chinese language base comparatively the strongest. Already, 46 partnerships exist with Chinese HEIs (OECD, 2003b: 43). Six examples of SingaporeChina programmes are treated here: 1. National University of Singapore (NUS) inaugurated its Shanghai College in 2003, partly in collaboration with Fudan University, and major Chinese firms. Essentially a placement programme with a strong focus on technology entrepreneurship, it directly parallels NUS’s other overseas campuses, such as that in California’s Silicon Valley, Beijing

88 The Dragon, The Tiger Cubs and Higher Education

and India. All are based on the same aim: “The programme targets NUS undergraduates with the academic ability and entrepreneurial drive, keen to be immersed as interns in start-ups located in leading entrepreneurial and academic hubs of the world” (NUS Overseas Beijing, 2009). It offers internships of up to 12 months duration in Shanghai, with high-tech companies, often of international origin. Students are also required to take entrepreneurship courses at Fudan University, (which also has its developing stable of start-up companies). Credits obtained from these Fudan courses and the internship are credited towards the NUS degree requirements, and the aim is to stimulate development of both an entrepreneurial hub in Singapore, and trade between Singapore and Shanghai. In particular, the aim is to enhance Singapore firms” presence in China which, as indicated earlier, is already substantial, and where Singapore currently allocates most of its foreign direct investment. The goal is to develop experienced China professionals, with in-depth industry experience: “The NUS College in Shanghai (NCSH) programme takes advantage of the unique opportunities available at Shanghai and students will be immersed in an environment surrounded by the comprehensive scientific, industrial and financial development of Shanghai” (NUS Shanghai) The course aims to be revenue neutral for students. An NUS College in Beijing with an emphasis on technology entrepreneurship features a partnership with China’s Tsinghua University, and potential internships with high-tech companies in nearby science parks. The first cohort of ten students departed for Beijing in July 2009 (NUS Overseas Beijing). 2. The International Master of Business Administration (IMBA) programme, is a collaborative venture between National University of Singapore (NUS) and Peking University (PKU). The NUS advertises major benefits of the programme as being not merely undertaking a dual degree offered by NUS and Peking University, but as completing one of the first programmes in the world to offer modules in both English and Chinese. The programme claims to be able to meet the indigenous needs of business operation in China while tapping the expertise provided by both universities. The goal is for graduates to be not only effectively bilingual, but also to be equipped with business knowledge of both east and west, and to be effective Asia-Pacific professionals. The programme, offered in Singapore and Beijing, charges a full-time annual fee rate of S$18,000. 3. NTU’s Nanyang Business School has already established a partnership with Shanghai Jiaotong University, (established in 1897 and one of China’s top universities), who together offer an Executive MBA pro-

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gramme. Cementing NTU’s significant record of providing bilingual management programmes to senior policymakers and business executives in China, it was launched in Shanghai by Singapore’s (Acting) Education Minister in December 2003, and involves collaboration between the Nanyang School of Business, and SJTU’s Aetna School of Management. It furthered reciprocal arrangements whereby, for example, SJTU has been offering its MBA programme (with its depth knowledge of the Chinese business environment) in Singapore, in collaboration with NTU, as from 2002. A further interesting initiative in the cultural arena forms part of NTU’s push to widen its traditional dependence on commerce, science and industry, and to become more comprehensive. It has investigated collaboration with Peking University and Tsing Hua, in the area of humanities, as part of NTU’s plan to develop a leading Chinese Studies department. 4. Programmes are also offered by China to the Singapore market. Singapore’s senior civil servants can also avail themselves of Tsing Hua University’s Executive Programme for Senior Singapore Civil Servants, which has been running for some years. Tsing Hua’s website indicates that a cohort of such students recently completed the sixth such programme. 5. Examples of private sector partnerships include an exchange programme offered by the Singapore University of Management (SUM), established in January 2000 as the first publicly-funded private university with a focus on business and management programmes. It offers, inter alia, a one or two semester exchange programme with three Chinese universities: Nankai University, Sun Yat Sen University, and Xiamen University. The Ministry of Trade and Industry make an Asian Business Fellowship available, limited to scholars who are undertaking the exchange programme with Chinese partner universities. 6. The Lee Kuan Yew School of Public Policy (LKY SPP), established in 2004, signed Letters of Intent in late 2005 with three of China’s most prestigious universities: Peking University, Tsinghua University and Fudan University. Peking University is currently a Strategic Partner, while Tsing Hua and Peking University are also each members with the LKY School, of Policy Net, an initiative of the Princeton University’s Woodrow Wilson School of Public and International Affairs. Malaysia As with Singapore, the origins of the Malaysian higher education system are inextricable from the history of British colonialism. In Malaysia’s case, its history of ethnic relations is also a crucial component in

90 The Dragon, The Tiger Cubs and Higher Education

understanding the development of higher education. Some one-quarter of today’s Malaysians are classified as Chinese, and another 8% as Indian. Of all ASEAN nations, Malaysia subsidises the costs of higher education the most. 92.7% of direct expenditure on tertiary education institutions is public, which compares with 52.4% in Australia, and 44.5% in Japan (OECD, 2003a: 10). In Malaysia’s case this in effect amounts to a massive subsidy to Bumiputras (or ethnic Malays) since, traditionally, ethnic quotas have forced many non-ethnic Malays into private HEIs, or abroad for further study. It is estimated that more than 90% of private sector HEI enrolments are non-Bumiputra (Lee, 1999a and b: 53; Welch, 2008), while the selfsame policy of Malayanisation is sometimes said to have led to the appointment of less experienced bumiputra staff without all the necessary qualities of excellence and leadership, at public HEIs. Experienced non-bumiputras have tended to respond to the lack of career prospects at such institutions, and the loss of salary relativity, by migrating to the private sector, or overseas. Although small institutions existed earlier, the University of Malaya in Singapore, in 1949, can be said to represent the beginning of the Malaysian higher education system. In the post-colonial era, overall enrolments grew rapidly: Table 3.17 1970–2008

Higher education enrolments, degree and diploma, Malaysia,

Enrolments

1970

1980

1990

2000

2005

2008

Degree Diploma

3,318 7,677

12,262 20,018

28,010 60,030

170,924 92,308

224,527 148,025

222,079 177,773

10,995

32,290

88,040

263,282

372,552

399,852

Total

(Compiled from Lim, “Malaysian and Singaporean Higher Education”, 1995: 77; Morshidi, 2006: 107–108) NB: Public Sector only.

Malaysian HEIs also began to diverge from their common British heritage during the 1980s – but only in part. From 1970 Bahasa Malaysia was mandated as the official medium of instruction in higher education, with only a few exceptions, more at the post-graduate level. The former dominance of expatriate staff ended, with local Malaysian academics, largely Bumiputras, forming effective replacements. Malays had also been rapidly trained in the 1970s, in the aftermath of the race riots, to replace expatriate administrators. Nonetheless, this phenom-

Anthony Welch 91

enon of indigenisation was perhaps less of a break than might have been supposed: … the expatriate academic community has been rapidly and effectively replaced by a Malaysian academic community, but one which (was) basically trained and oriented in an academic culture whose beliefs and value system (was) basically western. Therefore, not surprisingly, many of them still continue(d) to perpetuate the same beliefs about theory, methodology, techniques and problems, including using a curricula in their teaching which (remained) Western biased (Selvaratnam, 1989: 196). By the 1990s, some of the more obvious Western legacies thought inappropriate to Malaysia had been abandoned. The dominance of English however, meant that while Bahasa Malaysia remained the language of instruction at public HEIs, English was used in private institutions as Table 3.18 shows. Enrolments rose rapidly over the 1990s – but nonetheless failed to keep pace with unrelenting demand. Table 3.18 1995–2000

1995 1998 2000

Undergraduate enrolments in Malaysian public and private HEIs,

Public HEIs

Private HEIs

79,014 136,689 173,324

127,600 150,900 213,674

(Compiled from Arif Hassan, 2001: 115–122; and bin Saileh, 2001: 130. The 2000 total for private HEI enrolments includes 10,283 international enrolments)

Total enrolments in Malaysian HEIs (excluding Polytechnics and Community Colleges) reached 616,869 in 2004, of which 293,978 were within the public sector, while enrolments in 2007 totalled 734,917, of which 369,117 were within the public sector (Said, 2008) From 2000–2005, numbers of private university rose from five to 11, private university colleges from none to 11, and branch campuses from three to five (Kaur et al., 2008: 13). By 2008, numbers of public and private HEIs were equal at 20 each (Kaur et al., 2008: 7). 1995 saw Malaysian HEIs still able to offer places to only 6% of the age cohort, at that time, among the lowest among ASEAN nations (Lim, 1995: 77). (This is claimed to have now reached 16% of those aged 17–23). According to Lim, this meant that enrolments were limited

92 The Dragon, The Tiger Cubs and Higher Education

to between 25% and 40% of qualified applicants each year, over the 1980s. In practice, this meant both continuity and change. Continuity was seen in the fact that large numbers of Malaysians continued to study abroad: whereas some 8,200 applicants were admitted to domestic universities in 1985, for example, a further 43,200 were studying for degrees overseas, and another 2,300 for Diplomas (Lim, 1995: 78). The combination of limited domestic capacity, ethnic quotas and an appetite for overseas study, was largely responsible: World Bank data for the mid-1990s showed that some 34% of total Malaysian tertiary enrolments were nationals studying abroad (World Bank, 2000: 124). This represented a total annual cost of some US$600–980 million, and has been an ongoing concern, spawning an Expatriate Programme in 1999, designed (not entirely successfully) to lure skilled Malaysians back home (Kassim, 2002: 330). Change was evident in the moves to expand private higher education, licensed by the passage of key legislative instruments. These included the Private Higher Education Act (1996), National Council on Higher Education Institutions Act (1996), the National Accreditation Board (1997), the Universities and University Colleges (Amendment) Act 1996 and the National Higher Education Fund Board Act 1997. The ongoing squeeze on places and funds led to significant expansion of private higher education in the years following 1996, including branch campuses, and twinning programmes. This effectively shifted the balance from strong state support to forms of strategic cooperation and competition, now termed Malaysia Inc. “A Malaysia Inc approach in education is making it possible for the private sector to meet the needs for tertiary education by offering degree, diploma and certificate level courses” (Education in Malaysia).

Table 3.19

Private HEIs in Malaysia, as of May 2001 No. of institutions

Institution type

No. of students

No. of academics

Total

Kuala Lumpur

Total

Kuala Lumpur

Total

Kuala Lumpur

College status University status University branch campus

652 10 4

158 2 2

209,589 20,839 1,641

48,512 933 110

8,455 855 95

1,808 45 11

Total

666

162

232,069

49,555

9,395

1,864

(Sohail and Saeed, 2003: 175)

Anthony Welch 93

The Seventh Malaysia Plan (1996–2000) contained ambitious targets for education, not least higher education. Of the total education allocation, some 35.1% was planned “to expand the capacity for tertiary education, particularly at degree level” (bin Zakariah, 2000: 118). The regional economic crisis dented these ambitions, if temporarily, but also increased the likelihood that the private sector would expand. By 2001, private higher education had indeed expanded considerably, as seen in Table 3.19. The regional financial crisis of the late 1990s meant that the very generous system of national scholarships that financed thousands of ethnic Malays abroad was curtailed, at least temporarily. Altogether, tens of thousands of Malaysian students returned from abroad, causing a swell in domestic enrolments, and difficulties in staffing. Equally, opportunities for domestic academic staff to study abroad were curtailed: … university tutors and lecturers (were encouraged) to further their postgraduate studies within any Malaysian university. This intention was to reduce the cost of staff development and to reduce the outflow of Malaysian currency. This made the university teaching profession less attractive to newcomers. As a result, there was a significant decrease in the number of applications for the posts of tutors and lecturers (bin Saileh, 2001: 130). When study abroad was again opened up, efforts were made to curtail costs by expanding twinning programmes, which had the effect, inter alia, of reducing the time spent abroad by staff: “The arrangement enables academic staff to be trained and later gain foreign university degrees by spending only a quarter of their time at the foreign university” (bin Saileh, 2001: 134). Cost savings would have been considerable, but it is arguable that the quality of the experience for Malaysian staff also declined. At least anecdotal evidence exists of a similar trend of withdrawal from foreign study by Malaysians, in response to the (GFC) of 2008–2009 (Star Online, 2009). Malaysian membership of the Commonwealth lay, at least in part, behind the history of internationalisation of its higher education system. Sunway College was one of the major early initiatives in twinning arrangements, which at the time was the only means to avoid the restrictions of the 1969 regulations that prevented private colleges from offering degrees. It fostered links with eight universities in New Zealand, Australia, the UK, and the USA, and by the late 1990s had an

94 The Dragon, The Tiger Cubs and Higher Education

enrolment of 3,500 (Lee, 1999b: 48). Several UK and Australian universities, notably Monash and Curtin University of Technology from Australia, and Nottingham from the UK, established branch campuses in Malaysia. The Monash campus, established in 1998, and known as Monash Sunway, offers degrees in commerce, law, economics and computing, with the prospect of transfer to the Australian campus, with credit. From the Malaysian perspective, these branch campuses have several advantages. Firstly, this includes responding to the demand for skilled personnel, most particularly in areas such as engineering, technology, and the emerging sciences such as Information Technology (IT). At the same time, students can save travel and living costs associated with living abroad, while the additional infrastructure costs the government little. Secondly, “the presence of off-shore campuses will provide the impetus to both public and private local higher education institutions to improve their quality and standard of education” (bin Zakariah, 2000: 129). The establishment of these branch campuses is only possible with the permission of the Ministry, and after gaining accreditation by the Lembaga Akreditasi Negara (LAN), the National Accreditation Board listed above. The overseas institution must operate according to certain conditions. One of the most significant is the conduct of courses in Bahasa, although exemption may be provided to teach some courses in English or Arabic (something clearly necessary in the case of twinning programmes, and also institutionalised at the International Islamic University of Malaysia (IIUM). Secondly, all such campuses must teach the following courses: “Malaysian Studies, Islamic Studies (for Islamic students), and Moral Education (for nonIslamic students)” (Lee, 2003: 30; see also Banks and McBurnie, 1999). Past Minister, Tan Sri Musa Mohamad, reiterated in December 2003, that part-time, distance and online qualifications from non-accredited HEIs, some of which were characterised as being of “dubious quality … (and) not even recognised in their own country”, would not be accepted for purposes of public sector employment (Study Malaysia, 2003). Some have urged caution in relation to these and other events, to ensure that “the quality of education, among other things, is upheld, fees are reasonable, and the teaching learning facilities that are provided are at par with public institutions” (Hassan 2001: 122). Equally, concerns have been voiced in Australia, as regards the parity of quality of the Malaysian campus, the extent of quality assurance applied by Australia to such offshore operations (Coleman, 2000), and the working conditions, relative to the main Monash campus. The rapid growth of private sector

Anthony Welch 95

HEIs from the mid-1990s, a result of government privatisation policy, has led to considerable concerns being voiced about the potential for a decline in quality: “Do less privileged students pay more for inferior education that is available in some private institutions?” (Hassan, 2001). The most recent stage has seen a coordinated attempt to upgrade domestic HEIs (USM was nominated an “Apex” university in 2008), as part of positioning Malaysia as an educational hub within the region. For some years, the government has provided assistance and encouragement to private HEIs to attract greater numbers of international students, with private international enrolments rising to 12,000 in 1999. International enrolments at public universities numbered 5,239 in 2003, according to official figures, while the Ministry of Education claimed that students from 57 countries are now enrolled. MoE statistics for 2004 showed a total of 32,254 international enrolments, of which 25,939 were in public sector HEIs. For 2007, international enrolments totalled 45,550, with greater growth in public sector institutions, than in private (see Table 3.20). This is largely in accord with earlier OECD estimates of about 19,000 international enrolments (OECD, 2003a: 39). The Study Malaysia website is designed to sell potential students on the attractions of pursuing degrees at Malaysian universities. Foreign universities are being encouraged to set up offshore branches in Malaysia – “but only the best will receive approval”. The Malaysian Association of Private Colleges and Universities (MAPCU) also advertises its interest in promoting Malaysian education internationally, including via international allegiances. This includes establishing branch campuses of reputable foreign universities in Malaysia, and twinning arrangements. It argues that quality is ensured by maintaining parity of course content and academic standards, although degrees are awarded locally. In certain cases, twinning programmes are now Table 3.20 2002–2007

International enrolments, Malaysian public and private HEIs,

Year

Public

Private

Total

2002 2003 2004 2005 2006 2007

5,045 5,239 5,735 6,622 7,941 14,324

22,827 25,158 25,939 33,903 36,449 33,604

27,822 30,397 31,674 40,525 44,390 47,928

(Singh, 2008)

96 The Dragon, The Tiger Cubs and Higher Education

conducted entirely in Malaysia (the so-called 3+0 model) although the degrees continue to be conferred by the foreign universities. The recent staging of Malaysian universities Expos in countries such as Thailand, China, Indonesia and Brunei was coordinated by the Ministry of Education, and under the newly established Ministry of Higher Education, regional offices were established, including in Beijing, to promote Malaysian higher education. Current policy has moved from a heavy dependence on the state, towards a “Malaysia Inc.” approach, which embraces both domestic private sector HEIs, and foreign HEIs, as the Ministry’s website indicates: To take full advantage of the opportunities offered by an increasingly borderless world, foreign universities are being encouraged to set up offshore branches in Malaysia, but only the best will receive approval. At the same time corporations have been given the mandate to establish private universities. This dynamic relationship between government, the private sector and strategic foreign academic partners will no doubt help us realise our goals (Banks and McBurnie, 1999: 270). While obstacles to further expansion, in particular achieving the ambitious target of 100,000 international enrolments by 2010, are acknowledged, so are the benefits of the existing progress on internationalisation to Malaysia: … Malaysia has benefited tremendously from engaging with the rest of the world. Just as our companies and governments have found it necessary to think and act globally in this rapidly converging environment, our universities too have found it necessary to include an international perspective in their core business of teaching, research and service … (Tun Razak, 2005, cited Singh, 2008). … Indeed, the internalisation effort is advantageous to Malaysia in a number of ways. It provides high quality education within the country, in a cost-effective manner for our own young people whilst attracting international students to our shores, as part of the educational offerings of Malaysia … (Tun Razak, 2007, cited in Singh, 2008). Malaysia-China trade and collaboration in higher education Much of the above relates only imperfectly to China. For a country with more than one-quarter of its population defined as of Chinese ethnicity,

Anthony Welch 97

ambitious plans to develop into a regional education hub, and geographic proximity to its large and powerful neighbour, it is perhaps curious that Malaysia did not develop more solid China links earlier, especially in public sector HEIs (Welch, 2004b), although progress has accelerated swiftly in recent years. Of the more than 5,000 international students enrolled at Malaysia’s public universities in the earliest years of this century, for example, a mere 119 were listed as originating from China (although many more were enrolled in the private sector). In the reverse direction, 136 Malaysian students were listed as studying in China. By 2007, while Indonesia had supplanted China as the largest source country for Malaysian higher education, the Chinese total of 9,146 still comprised 22.8% of total international enrolments in 2005 (IIE, 2009). Recipients of awards to study in Malaysia, that were covered by MoUs, were modest, as indicated in the following table. Table 3.21 Awards to Chinese students covered by MoUs, to study at Malaysian public universities Year

Total

2000–2001 2001–2002 2002–2003 2003–2004

10 – 5 3 offered, one filled

(Personal communication, MoE)

Modest evidence of ongoing staff or student exchange programmes, twinning, branch campuses, or research collaboration, was found, mainly within the private sector. Within public sector HEIs, for example the University of Malaya’s Centre for Civilisational Dialogue, the only evidence of links with China was a Centre publication by Bakar and Cheng, entitled Islam and Confucianism: A Civilizational Challenge. At the system level, the evidence of trade in educational services consists of attempts to project Malaysian higher education into China, via the recent staging of Malaysian Expos in China, listed above. Clearly, China (as well as the Middle East, Viet Nam and Indonesia) is a priority for recruiting international students to Malaysian higher education system (Kaur et al., 2008: 17). At the institutional level, limited further evidence was found to assess the success of such ventures, in recruiting Chinese students for its universities: the Multimedia University of Malaysia (MMU) for example, used their mainland Chinese Assistant Manager of its Centre for International Recruitment to successfully recruit students from Northwest China: “He has arranged for more than 200 students from Northwestern provinces of

98 The Dragon, The Tiger Cubs and Higher Education

China to study in Malaysia, and granted scholarships to them” (ChinaASEAN Information Network, 2009). Overall, the private sector fared somewhat better. Inti College has had a campus, the Beijing Inti Management College (BIMC) operating in Beijing since 1994. The China programme students study at BIMC and later apply for further study in Inti’s partner universities in UK, Australia or to the main campus in Malaysia. Evidence of formal staff and/or student exchanges, or research collaboration, by public sector HEIs was absent. Viet Nam The contours of the Vietnamese higher education system continue to be affected by the legacy of many of the same factors that have shaped its overall economy, culture and society. Re-unification, less than 40 years old, has left its mark on the Vietnamese higher education system, as has the fact that so much of its energy and resources were long consumed by the needs of successive defence budgets. As indicated earlier, Viet Nam has only been free of war for a little over 20 years, after decades-long struggles, successively against French, US, and Chinese forces. While rises in higher education enrolments have significantly outstripped those at elementary and secondary levels, (more than doubling each year during the mid-1990s), the persistence of significant economic constraints limits the capacity of the public system to meet everincreasing demand. Poor coordination, low levels of efficiency, and some lingering unresponsiveness to the needs of a modernising economy and workforce, also continue to weaken state capacity in higher education, just as they do within other sectors (see above). Hence, it is clear that Viet Nam will see further growth of private higher education, over the coming years. Indeed, despite some problems, privatisation (termed in Viet Nam, as in China “socialisation”) is set to continue and expand over the coming decade, as Table 3.22 indicates. Nonetheless, the longstanding national value placed on public education means that it continues to receive strong support by both the state, and households, despite, as seen above, low levels of GDP per capita. The government, for example, has made sustained efforts to maintain or even extend the proportion of the budget devoted to education, which was estimated to be 3.5% of GDP in 1995, or 12.3% of the total state budget in 2003 (Dai, 2006: 229). To the 3.5% of GDP, however, must be added a further 2.5% of GDP that is contributed by households and by formal cost recovery measures, thus making an impressive total of some 6% of GDP (Kelly, 2000). Nonetheless, for some decades Viet Nam has struggled to accommodate demand for higher education, as its secondary schools continue to pour out graduates eager for places in its colleges and universities.

Anthony Welch 99

Given ongoing resource constraints, and low levels of GDP, however, the attainment of Viet Nam’s ambitious targets for education in the decade 2001–2010, as indicated in the following table, must remain questionable. Equally, its newly announced plan to develop several “Apex” universities, announced in 2008, might principally divert resources from the rest of the system, resulting in further strain. Table 3.22

Viet Nam’s higher education targets, 2001, 2010 and 2020

Target

2001

2010

2020

% of higher education enrolment in semi-public and private HEIs Net upper secondary enrolment % of trained working labour force Higher Education students per 10,000 Enrolment of Masters candidates Enrolment of Doctoral candidates Lecturers with Masters Degrees Lecturers with Doctoral Degrees % of revenue from non-state sources

10%?

30%

40%

38% 19% 118 11,727 3,870 27% 18% –

50% 42% 200 38,000 15,000 40% 25% 15%

– 42% 450 – – 60% 35% 25%

(World Bank Viet Nam, 2001: 62; Socialist Republic of Viet Nam, 2002: 27; HERA, 2005. 2010 targets are largely from the earlier documents, and 2020 targets are as specified by HERA)

It should also be noted that if these ambitious targets are met, especially at the upper secondary level, it will only further increase the current pressure on the higher education system. It is also difficult to see how the above targets to expand private higher education could be met without exacerbating existing issues regarding quality, in a system where low public sector salaries, combined with significant shortages of well-qualified academic staff, means that private sector HEIs are mostly dependent on public sector faculty moonlighting from their regular job (Welch, 2007b, 2010a). In this context, it is clear that, as with China, which faces something of the same difficulties in meeting demand within the state system, the extension of private HEIs will expand over the coming years. The revision of the Constitution in 1992 gave priority to investment in education and encouragement to other (non-state) investors, and since then the number of dan lap or “People-established” universities, has expanded. (Just as in China – and for the same reasons – the term “people’s universities” is preferred to that of “private universities”). Enrolments in higher education are still very largely at public sector HEIs, although enrolments at “People’s” HEIs continue to grow rapidly.

100 The Dragon, The Tiger Cubs and Higher Education

The following two tables give a clearer idea of numbers in both public and private sector HEIs, and how the proportions have changed, revealing for example, growth of 85.6% in the private sector, and 65.4% in the public, over the years 2000/1 to 2006/7. Table 3.23 Higher education enrolments by institution and category, 2000/1 and 2006/7 Students

University 2000/1

Total 2000/1

College 2006/7

91,457

309,506

400,963

197,602

645,101

842,703

1,817

1,425

3,242

5,366

6,266

11,632

Public

171,922

642,041

813,963

330,753

1,015,977

1,346,730

Nonpublic

14,801

89,464

104,265

36,301

157,170

193,471

Female Minority

College 2000/1

University 2006/7

Total 2006/7

Full time

148,893

403,568

552,461

263,722

411,409

675,131

In-service

19,819

223,837

243,656

103,332

495,738

599,070

Other

18,011

104,100

122,111

Graduate students

45,757

117,353

163,110

71,064

161,411

232,475

186,723

731,505

918,228 1,173,147

143,017

1,540,201

Total

(Education and Training in Viet Nam 2002; MOET 2002; and Information Section, MOET, 2002; www.moet.gov.vn/?page=11.10&view=9266)

Table 3.24

Enrolments, public semi-public and private HEIs, 1996/7–1998/9

Type of HEI

Number 1996/7

% 1996/7

Number 1997/8

% 1997/8

Number 1998/9

% 1998/9

Public

87.17

525,596

88.50

631,994

88.35

696,375

Semi-public

42,448

7.15

37,518

5.25

33,254

4.16

People’s

25,840

4.35

45,719

6.39

69,288

8.67

100.00

715 ,321

100.00

798,817

100.00

Total

593,884

(Information Section MOET, 2002)

The data above in Table 3.23 reveal that effectively, private sector HEI enrolments increased faster than within public sector HEIs: 85.6% compared to 65.4%. Table 3.24 shows that the share of enrolments captured by the private sector over the three years from 1996/7 to 1998/9 doubled: from 4.35% to 8.67%. Without a dramatic policy shift,

Anthony Welch 101

it is predictable that growth in the private sector is likely to outstrip that in public sector HEIs, at least in the medium term. All the more so, when Vietnamese public sector HEIs have only been able to place about 10% of qualified secondary graduates. Indeed, the Ministry of Education and Training’s (MOET) plans envisage private sector HEIs catering to 30% of total enrolments by 2010, and 40% by 2020 – a big rise from the level of 11% or so of 2000 (Welch, 2010a). Certain elements within MOET, however, are less than content with this, and continue to resist the planned changes. There is also wider evidence of significant problems in the system as a whole, which this move to extend privatisation may well exacerbate. In particular, quality of teaching staff remains an issue, with less than 20% of academic staff holding a doctorate. (Of those who do, many gained their post-graduate degrees decades ago, in the former USSR, or in one of its former satellites, and are not research active). Significant numbers are due to retire soon, and at current remuneration levels, it will not be simple to replace them. Low resource levels mean that many HEIs need to run small businesses, in order to gain additional income, and this further detracts from the energy available for teaching, learning and research. Moonlighting (the practice of full-time public sector staff, having a second, or even a third job in a private sector HEI, in order to gain additional income), is a major problem, detracting from the already modest levels of resources available in public sector HEIs. Private sector staff are often less well qualified than their public sector peers, although better remunerated. Quality assurance is a major issue, not least in the private sector, which recently was caught up in a major scandal (Tipton et al., 2003; Welch, 2007b, 2010a), involving lower standards, over-enrolments, and bribery. Ministry officials were also not found to be entirely exempt. Despite strong rhetorical support from government, in practice it has been difficult to maintain levels of public funds, in light of the need to expand the system, and parents have had to shoulder a larger financial burden, as a result. Hence there is a concern that equity, already a significant issue, may well worsen, in the face of higher fees. A further parallel with the Chinese university system consists of the aim to use international partnerships to raise quality and extend access via international partnerships. Each such partnership must be accredited at the Ministry level. Of such existing connections, one of the more significant is that of Royal Melbourne Institute of Technology (RMIT) which opened a purpose built campus in Sai Gon in 2001, and subsequently a smaller parallel campus in Ha Noi. Most recently,

102 The Dragon, The Tiger Cubs and Higher Education

Germany, France and the USA have each announced plans to create universities in Viet Nam, although only the German institution has yet opened its doors. Twinning also exists in the form of a partnership between Ha Noi Economics and Ho Chi Minh Economics, and the Institute of Social Studies in the Hague, Netherlands. Founded as a donor programme in 1994, the two-year course graduates some 60 students a year, using Dutch, Vietnamese and other international teaching staff. As aid and teaching support from Holland was phased out, the course, taught in English, moved from full-time to part-time, to cater both for local employed Vietnamese students, as also others who may be on mission for an agency, or employed in Viet Nam on a commercial contract. Other such twinning programmes have been less successful. Many Vietnamese students also study abroad, especially those who can take advantage of the perhaps 2,000 or so scholarships made available by foreign countries and HEIs, or those (largely from Viet Nam’s south) who are able to afford the significant fees, sometimes with (overseas) family assistance. By no means all return at the end of their period abroad, however, and ministry officials and others continue to be highly concerned about the ongoing loss of talent. Significant reservations also continue to be expressed about the dangers of deploying Viet Nam’s considerable highly-skilled diaspora (Welch, 2010). Viet Nam-China trade and collaboration in higher education Can links with China in higher education also help to achieve the aims expressed above, of using international partnerships to both raise quality and extend access? Existing higher education links to China are difficult, if not impossible to trace fully. MOET data (2004 personal communication) reproduced in the Appendix refers only to public HEIs, and it is impossible to be sure how many of these MoUs represent genuinely functional partnerships, or merely formal agreements, without real life or substance. One of the more substantive forms of collaboration consists of the provision of foreign language training by the College of Foreign Languages, Viet Nam National University (VNU), Ha Noi, to Chinese students. The following figures supplied by MOET reveal very modest enrolments by Vietnamese students at Chinese universities, via institutional agreements. These are strongly outweighed by those in the reverse direction, as revealed in Tables 3.25 and 3.26. Such formal agreements between public sector HEIs comprise only a small proportion of the much larger number of Vietnamese enrolments at Chinese universities cited earlier. Clearly, the number of private and

Anthony Welch 103 Table 3.25 Vietnamese students at Chinese universities, institutional agreements, 1992–1993 to 2003–2004 Enrolments 1992–1993 1993–1994 1994–1995 1995–1996 1996–1997 1997–1998 1998–1999 1999–2000 2000–2001 2001–2002 2002–2003 2003–2004

Undergraduate 5 6 6 3 5 10 15 10 11

Graduate 4 4 4 7 5 15 3 14 17

Non-degree

Total

1 10 10 10 10 20 21 21 22

10 20 20 20 20 45 39 45 50 66 30 22

Total

387

(MOET, 2004 personal communication)

Table 3.26 Chinese students at Vietnamese universities, institutional agreements, 1992–1993 to 2003–2004 Enrolments

Total

1992–1993 1993–1994 1994–1995 1995–1996 1996–1997 1997–1998 1998–1999 1999–2000 2000–2001 2001–2002 2002–2003 2003–2004

6 5 5 5 1 7 7 8 5 6 6 16

Total

75

(MOET, 2004 personal communication)

scholarship students from Viet Nam enrolled in Chinese universities vastly outweighs those cited above. Indeed, notwithstanding some past historical tensions, the totals covered by cross-border institutional agreements are surprisingly small, especially for large neighbours, and countries with significant historical and cultural affinities. Scholarships

104 The Dragon, The Tiger Cubs and Higher Education

are a further element of bilateral collaboration, and as indicated above, China provided 130 scholarships to Vietnamese students to study at Chinese universities in 2003, while in 2009, the two ministries agreed to further strengthen cooperation, notably by training at least 1,000 PhD candidates in China over the following 12 years. More than profound differences in size between the two systems is evident from the list of bilateral institutional partnerships, however (see Appendix). With the exception of a single link between the National Economics University of Ha Noi, and the University of Hong Kong, there is no further representation from Hong Kong universities. Perhaps this reflects, in part, that Hong Kong’s re-unification is little more than a decade old, and that its priority has been, understandably, to further its integration with mainland universities. It may also reflect the relatively low priority attached to Viet Nam, among Chinese institutions, particularly those from wealthy Hong Kong. The list of Vietnamese HEIs again reinforces findings from elsewhere, that it is the larger and more solid HEIs that are better able to take advantage of international partnerships (Yang, 2002; Huang, 2003a and b). With very few exceptions, the Vietnamese HEIs listed comprise major institutions in Ha Noi and Saigon. The range of Chinese HEIs by contrast is more mixed, including some of China’s top universities, and a range of others. Specialist HEIs are well-represented on both sides, as might be expected, given the traditional mono-technic structures of higher education in each (in each case an inheritance of the old Soviet model). If relations between public sector HEIs are hard to trace, private partnerships are even more so. Fragmentary evidence suggests several links exist between private HEIs, mainly in Ho Chi Minh city, and various Chinese HEIs. One example consists of an agreement between the privately founded Dai hoc Dan lap Ky Thuat (People’s University of Technology) in Ho Chi Minh city, and Tianjin University, which resulted in a Vietnamese student being invited to Tianjin, for three months. The relatively new and dynamic private College of Technology and Industrial Management (CTIM), headed by Chinese-speaker and Tsing Hua graduate Professor Thuc, formerly Vice Rector of the University of Technical Education (UTE) in Ho Chi Minh city, has links with Tianjin University, to exchange teachers and students each year. Several CTIM students have also studied for a time at South China Normal University, as also one of CTIM’s Chinese-language staff. A further relationship exists between CTIM and Hunan Normal University where, again, one of CTIM’s language teacher is studying. This exchange involves exchange of students at undergraduate level, and teachers, who study

Anthony Welch 105

for a Masters degree. Staff visits have been arranged, together with short courses for students, at low cost. It is likely that Professor Thuc’s dynamism, and Chinese experience, lie behind these partnerships.

Conclusion: Summary and policy implications Clearly, rationales for both competitive and cooperative strategies in bilateral and multilateral educational services trade, are mixed. It is also important to point out that only China and Viet Nam, of the four countries considered here has made a specific GATS commitment in the area of educational services, (although Malaysia for example, has made commitments in financial and other services). Drawing on the above case studies of cross-border connections in education, however, it is possible to distil elements that make successful cross-border endeavours more likely. The following table summarises the existing relationships between each of the tiger cubs, and China, within the higher education sector.

Table 3.27

China-ASEAN cross-border educational services – a summary

Mode I Singapore

Mode II

NTU management Chinese students training (by at Singapore distance) universities Singapore students at Chinese universities Tsing Hua Exec. Programme

Mode III

Mode IV

NUS Fudan (Shanghai College)

NTU Management Programme (in Shanghai)

NUS Tsing Hua (Beijing College) NUS Peking (IMBA) Sjtu NTU (MBA)

Malaysia

Viet Nam

Chinese students at Malaysian universities

INTI college (Beijing Campus)

Malaysian students at Chinese universities

NTU Nanyang Centre for Public Administration

VNU language courses for Chinese students Vietnamese students at Chinese universities

(Notes: Italics indicate Chinese exports; non italics indicate Chinese imports)

Chinese consultants training Vietnamese

106 The Dragon, The Tiger Cubs and Higher Education

Several conclusions may be drawn from the above analysis. Perhaps the first is that, given the lack of detailed data on the extent of crossborder services in education, something that this paper, and other current research by the OECD is designed to address, more research is needed. The case for detailed research into China-ASEAN trade in services is particularly compelling, as ASEAN itself points out: “While there is information on aggregate level of commercial services trade by China and ASEAN, there is little statistics on bi-lateral or ASEAN-China trade in services” (ASEAN, 2001: 13). Secondly, the differential pattern of engagement with China in the realm of educational services is worthy of some reflection. Clearly, Singapore’s wealth, well-developed infrastructure, including that of ICT, and strongly-supported universities, leave it best-positioned of the three tiger cubs, to take advantage of opportunities in China, notwithstanding its relatively small size, and uncertain history in China (see above). Its strong service-sector presence in the region, and substantial history of engagement with China, especially in the service sector, confers a further advantage. (In this sense, perhaps, the parallel with Hong Kong is striking, notwithstanding Hong Kong’s much greater proportion of Cantonese speakers). Malaysia’s ambitions to develop into a regional educational hub are as yet only partly translated into a significant engagement with the sizeable China market for educational services, especially within the public sector. While at one level this is surprising, given the competitive advantage that Malaysia’s significant ethnic Chinese population apparently confers, it may also reflect Malaysia’s complex ethnic history, and less well-developed infrastructure, both in higher education and other service industries, and ICTs, relative to Singapore. Viet Nam’s much less well-developed university system, more modest state capacity, and far smaller Chinese minority, leaves it least able to take up opportunities in China. Indeed, as was seen above, the principal example of its exports consisted of Vietnamese-language training for Chinese students, while significant numbers of Vietnamese students travel to China’s universities. In this sense, it may well be that the principal opportunity is for China to export educational services, including consultancy services, to Viet Nam. China’s own projection of its educational services internationally is clearly growing. The rising number of international students currently enrolled in China, including from each of the tiger cubs, and programmes offered in Singapore, may only be the beginning of a rising tide in China’s trade in educational services; all the more so, if the worldwide

Anthony Welch 107

importance of Putonghua continues to increase. As indicated, there are at least 220,000 international students enrolled in Chinese universities, although the pattern is concentrated in particular regions and cities. Universities in Beijing, for example, which by 2004 collectively enrolled some 33,000 international students, (a significant proportion of the total), announced plans to quickly increase this tally by 10,000 (Beijing Morning Post, 2004). Already, there is evidence of Chinese universities delivering training programmes to clients in Singapore. The initial plans to develop 100 Confucius Institutes, to teach Chinese language and culture, including in Singapore and Malaysia, but not yet in Viet Nam, have already been expanded to a target of 500 institutions. (By late 2008, some 300 had already been established). Such examples portend further expansion of higher education programmes delivered internationally in Putonghua, including via the web. The Dragon is awake and the implications for the region, including in higher education, are profound. The above analysis clearly shows that there is considerable scope for further growth in regional trade in educational services. It is as yet unclear how the mooted development of regional trade agreements might affect educational services: the ASEAN “roadmap” of regional economic integration being prepared in early 2004, for example, referred to other service industries such as tourism, but was conspicuously silent on the question of educational services. All four higher education systems have been nett importers of higher education services. This should not be taken to mean that there is not considerable scope for export growth, however: both Singapore, and China, already reveal elements that can be further developed, while Malaysia’s ambitions remain undimmed. Regulatory issues should not be underestimated however. There is evidence of complaints from some that regulatory barriers are preventing the extension of service sector trade into China. There is also evidence of some uncertainty in Singapore (Ziguras, 2003; Tan, 2008). Malaysia, by contrast, mandates certain courses as conditions for any private HEI to operate in Malaysia. It is one thing to say that the state will remain the most important regulator of quality (McBurnie, 2002: 163), but the rise of private higher education, including transnational, presents important challenges to regulatory capacity. Given that, as was indicated above, several regional governments already exhibit difficulties in regulating domestic HEIs, the addition of complex cross-border issues into the regulatory environment is only likely to add significantly to these difficulties (APEC, 2001; Welch, 2003, 2009). This becomes all the more significant given the substantial drift to an often less-well regulated private higher education within the region over the past decade,

108 The Dragon, The Tiger Cubs and Higher Education

with considerable loss of equity. Here the implications of globalisation are shown in sharp relief. If poor students of ability are increasingly being squeezed out of their traditional refuge in the generally higher quality domestic public HEIs (as they increase their fees levels, in the face of declining levels of state support), how much more is this the case for high fee courses provided by international suppliers (Welch, 2007a and 2009). Cross-border delivery of higher educational services among neighbours with cultural and linguistic affinities has the potential to apply local solutions to local problems; in particular, both contextually-based programmes, and reductions in commonly-experienced regional tensions between internationalisation and indigenisation. There are limits to such potential, however. The Asia-Pacific region is notably less well integrated than, say, the EU, or the Americas, in this regard, something that the ASEAN’s mooted regional FTA would change, especially with the inclusion of China. Given the cachêt that gaining a foreign degree from an English-language university still confers, however, especially a relatively elite one, growth in regional trade and collaboration may take time to change, but some of the partnerships between major regional institutions pointed to above already reveal signs of a shift. At the same time, the analysis has once more underlined that, just as with nations, it is the wealthiest systems, and better-established institutions, in the major urban areas, that are best placed to deliver such services. This finding reinforces that of other research, which shows that the benefits of internationalisation are not equally dispersed – but within an increasingly global knowledge network, almost always accrue to the more favoured institutions and systems (Altbach, 1994, 2002). Notwithstanding the worldwide economic crisis of 2008–2009, which afflicted both China and Southeast Asia significantly, but from which the former’s sharp rebound assisted the region’s recovery, China’s ongoing rise will continue to present both challenges and opportunities to the countries of Southeast Asia, in the increasingly complex, competitive and cross-border world of higher education. In this context, and in an era characterised by growing gaps between rich and poor, and increasing concentrations of wealth in relatively few hands, it is important to reiterate the public good dimensions of higher education policies (Hüfner, 2003), and their implications for equity, both within and between countries.

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116 The Dragon, The Tiger Cubs and Higher Education —— (2011) Higher Education in Southeast Asia. Blurring Borders, Changing Balance. London: Routledge. —— (2009) “Access and Equity in Southeast Asian Higher Education. Finance, State Capacity, Privatisation and Transparency”, in Knight J. (ed.) Financing Access and Equity in Higher Education. Amsterdam: Sense Publishers. Welch, A., and Cai, H-X. (2010) “Internationalisation of Higher Education in China: Retrospect and Prospect”, in Ryan, J. (ed.) Understanding China’s Education Reform: Creating Cross-cultural Knowledge, Pedagogies and Dialogue. London: Routledge. Welch, A. and Zhang, Z. (2005) “Zhongguo de zhishi liusan – haiwai zhongguo zhishi fenzijian de jiaoliu wangluo (Communication Networks of the Chinese Intellectual Diaspora)”, Comparative Education Review (Beijing), Vol. 26, No. 12, 31–37 (in Chinese). —— (2008a) “Communication Networks Among the Chinese Knowledge Diaspora: a New Invisible College?”, in Boden, R. et al. (eds) Geographies of Knowledge, Geometries of Power: Higher Education in the 21st Century: World Yearbook of Education 2008. London: Routledge. —— (2008b) “Higher Education and Global Talent Flows: Brain Drain, Overseas Chinese Intellectuals and Diasporic Knowledge Networks”, Higher Education Policy, pp. 1–19. WENR (2003) “China and the New Law Puts Growing Private Sector on Equal Footing”, Vol. 16, Iss. 5 (Sep/Oct). World Bank (2000) Higher Education in Developing Countries. Peril and Promise. Washington, World Bank. http://siteresources.worldbank.org/EDUCATION/Resources/ 278200-1099079877269/547664-1099079956815/peril_promise_en. pdf —— (2005). East Asia Update. Washington: World Bank. World Bank Viet Nam (2001) Entering the 21st Century: Viet Nam Development Report 2001. Hanoi: World Bank. World Factbook (2009a) www.cia.gov/library/publications/the-world-factbook/ geos/sn.html (Accessed 13 November 2009). —— (The) (2009b) www.cia.gov/library/publications/the-world-factbook/geos/ vn.html (Accessed 13 November 2009). WTO World Trade Organisation (2001a) Annual Report 2001. Geneva: WTO. —— (2001b) Working Party on the Accession of China: Schedule CLII – The People’s Republic of China. Part II – Schedule of Specific Commitments on Services. List of Article II MFN Exemptions. Geneva: WTO. —— (2002) Services Negotiations Offer Real Opportunities for All WTO Members and More for Developing Countries (Press Release 28 June).. Geneva: Switzerland. Xinhua News Agency (2004) “Exploding Enrolments Leading to ‘Professor Crunch’”, 4 February. Yang, R. (2002) Third Delight: The Internationalisation of Chinese Universities. London: Routledge. —— (2005a) “The Chinese Professoriate in Comparative Perspective”, in Welch, A. (ed.) The Professoriate: Profile of a Profession. Amsterdam: Kluwer. —— (2005b) “Corruption in China’s Higher Education System: A Malignant Tumour,” International Higher Education. —— (2008) “Transnational Education in China: Contexts, Characteristics and Concerns”, Australian Journal of Education, 52(3): 272–286. —— and Ngok, K.L. (2004) “Changing Governance and the Role of the State in Mainland China’s Higher Education”, Draft Paper, International Workshop on Emergence of Global Market of Education and Roles of State Governments, at the

Anthony Welch 117 National Institute for Educational Policy Research of Japan, Tokyo, December 2003. Yang, R. and Welch, A. (2001) “Internationalisation of Chinese Universities: A Case Study of Guangzhou”, World Studies in Education, Vol. 2, No. 1, 21–52. Yang, S.K. (2000) Educational Sciences. Internationalisation and Indigenization. Taipei: Yang-Chih Publishers. Yap, M.T. (2003) Singapore, Migration and the Labour Market in Asia. Paris: OECD. Zhang, F. (2002) Recent Situation of Economic Development and Migration Employment in China: Migration and the Labour Market in Asia. Paris: OECD. Zhang, G. and Li, W. (2002) International Mobility of China’s Science and Technology Resources and its Impact, International Mobility of the Highly Skilled. Paris: OECD. Zhang, X. and Xu, H. (2000) Internationalisation: A Challenge for China’s Higher Education: Current Issues in Chinese Higher Education. Paris: OECD. Zhang, Q. (2007) Political Embeddedness and Academic Corruption in Chinese Universities. Paper presented at the annual meeting of the American Sociological Association, TBA, New York, New York City, August 11, 2007 http://www.allacademic.com//meta/p_mla_apa_research_citation/1/8/2/7/9/pages182795/p1827951.php (accessed 10 May 2009). Zhong, N., and Hayhoe, R. (2001) “University Autonomy in Twentieth Century China”, in Peterson, G. et al. (eds) Education, Culture and Identity in Twentieth Century China. Hong Kong: Hong Kong University Press. Zi, H. (2003) “The Ministry of Education Set Up a Project under the ‘Light of Spring’ Programme for Overseas Student Talent to Come Back and Work in China during their Sabbatical Leaves”, Chinese Education and Society, Vol. 36, No. 2, 40–43. Ziguras, C. (2003) “The Impact of the GATS on Transnational Tertiary Education: Comparing Experiences of New Zealand, Australia, Singapore and Malaysia”, Australian Educational Researcher, 30(3): 89–110. Zweig, D. (2005) “Re-Defining the Brain Drain. China’s Diaspora Option. People on the Move. The Transnational Flow of Chinese Human Capital”, Conference Paper, Hong Kong University of Science and Technology (22–25 October). Zweig, D. and Chen, C. (1995) China’s Brain Drain to the US: Views of Overseas Chinese Students and Scholars in the 1990s, China Monograph Series. Berkeley: Institute for East Asian Studies.

Related websites “20 Years: a Chinese Overseas Student in ASEAN. Report from the China-ASEAN Week.” China-ASEAN Study Information Network, http://www.caedin.org/html/ Education-Cooperation-Week/ASEAN-Education-Tour-Exhibitions/200807/28446.html (accessed 3 January 2009). APEC www.apecsec.org.sg APRU (Association of Pacific Rim Universities) http://www.apru.nus.edu.sg ASEAN (Association of Southeast Asian Nations). Culture and Information www.aseansec.org/8202.htm ASEAN (Association of Southeast Asian Nations). ASEAN+3 Cooperation Work Plan 2007–2017. www.aseansec.org/21104.pdf ASEAN www.aseansec.org ASEAN member economies basic economic indicators http://www.aseansec.org/ macroeconomic/aq_sel1.htm

118 The Dragon, The Tiger Cubs and Higher Education ASEAN Statistics Unit, Statistical Yearbook www.aseansec/org/macroeconomic/aq ASEAN University Network (AUN) http://www.aun.chula.ac.th China Radio International “Singapore’s NTU Sets Up Centre for Chinese Officials” http://english.cri.cn/6909/2009/12/14/1461s535442.htm Ministry of Education, China, “Survey of the Educational Reform and Development in China”, Ministry of Education, China, www.edu.cn/20040107/3096934. shtml (accessed 3 January 2009). Ministry of Education China, Basic Education Statistics, http://www.moe.edu.cn/ edoas/website18/level2.jsp?tablename=1068 Ministry of Education, China www.moe.go.cn Ministry of Education, Singapore www.moe.go.sg Ministry of Education (Singapore) “Education Statistics Digest”, www.moe.gov.sg/ education/education-stistics-digest/files/esd-2009.pdf (accessed 10 January 2009). Ministry of Education, Malaysia http://keduak.moe.gov.my/english Some related ADB data is available at www.adb.org/Documents/Books/Key_ Indicators/2003/pdf Some related ESCAP data is available at http://www.unescap.org Some related OECD data is available at www.oecd/org/edu/eag2003 Some related UNCTAD data is available at UNCTAD www.unctad.org UNIVERSITAS 21 www.universitas21.com WTO/GATS http://www.wto.org/english/tratop_e/serv_e/gatsqa_e.htm

Appendix Members of APEC Education Network: China, Hong Kong (China), Japan, Korea, Thailand, Malaysia, Indonesia, Philippines, Singapore, Brunei Darussalam, Taiwan, Viet Nam, Papua New Guinea, Australia, New Zealand, Usa, Canada, Chile, Mexico, Peru, Russia. Member Institutions of AUN: 1) University Brunei Darussalam (UBD) 2) Royal University of Phnom Penh (RUPP) 3) Universitas Indonesia (UI) 4) Universitas Gadjah Mada (UGM) 5) National University of Laos (NUOL) 6) Universiti Sains Malaysia (USM) 7) Universiti Malaya (UM) 8) Institute of Economics (IE) 9) University of Yangon (UY) 10) University of the Philippines (UP) 11) De La Salle University (DLSU) 12) National University of Singapore (NUS) 13) Nanyang Technological University (NTU) 14) Chulalongkorn University (CU) 15) Burapha University (BU) 16) Viet Nam National University-Ha Noi (VNU-Hanoi) 17) Viet Nam National University-Ho Chi Minh City (VNU-HCM)

Anthony Welch 119 Member Institutions of APRU: Australia Australian National University (Canberra) University of Melbourne (Melbourne) University of Sydney (Sydney) Canada University of British Columbia (Vancouver) Chile University of Chile (Santiago) Chinese Taipei National Taiwan University China Fudan University (Shanghai) Hong Kong University of Science and Technology (Hong Kong) Nanjing University (Nanjing) Peking University (Beijing) Tsinghua University (Beijing) University of Science and Technology of China (Hefei) Zhejiang University (Zhejiang) University of Hong Kong (Hong Kong) Chinese Taipei National Taiwan University (Taipei) Indonesia University of Indonesia (Jakarta) Japan Keio University (Tokyo) Kyoto University (Kyoto) Osaka University (Osaka) Tohoku University (Tokyo) University of Tokyo (Tokyo) Waseda University (Tokyo) Korea Seoul National University (Seoul) Malaysia University of Malaya (Kuala Lumpur) Mexico National Autonomous University of Mexico (New Mexico City)

120 The Dragon, The Tiger Cubs and Higher Education New Zealand University of Auckland (Auckland) Philippines University of the Philippines (Quezon City) Russia Far Eastern National University (Vladivostok) Singapore National University of Singapore (Singapore) Thailand Chulalongkorn University (Bangkok) United States of America California Institute of Technology (Pasadena) Stanford University (Stanford) University of California, Berkeley University of California, Davis University of California, Irvine University of California, Los Angeles University of California, San Diego University of California, Santa Barbara University of Oregon (Eugene) University of Southern California (Los Angeles) University of Washington (Seattle) Current member institutions of UNIVERSITAS 21: – McGill University – The University of British Columbia – The University of Virginia – The University of Birmingham – The University of Edinburgh – The University of Glasgow – The University of Nottingham – Lund University Sweden – University College Dublin – Fudan University – Shang Hai Jiao Tong University – The University of Hong Kong – The National University of Singapore – The University of Melbourne – The University of New South Wales – The University of Queensland – The University of Auckland – Delhi University – Waseda University – Korea University – University of Monterrey

Anthony Welch 121 FORMAL AGREEMENTS, PUBLIC HEIS VIET NAM Vietnamese institutions Hanoi Uni. of Technology

AND

CHINA

Chinese institutions – Qing Hua Uni. – Tian Jin Uni. – Beijing Uni. of Sience and Technology – He Bei Normal Uni. College of Foreign Languages of – Beijing Uni. of Languages and Culture National University, Hanoi – Beijing Uni. of Foreign Languages – Yun nan Uni. – Guang Zhou Uni. of Foreign Languages and Trade – Ethnology Institute, Guang Xi – Wuyi Uni., Jiang Men Hanoi Uni. of Foreign Studies – Beijing Uni. – Shanghai Normal Uni. – Ethnology Institute, Guang Xi National Economics Uni.Hanoi – Wuhan Economics and Finance Uni. – Shanghai Economics and Finance Uni. Uni. of Foreign Trade Hanoi – Beijing Uni. for Foreign Economic Relations – Uni. of Hong Kong Uni. of Transport, Hanoi – Northern Transport Uni. Uni. of Agriculture, Hanoi – Uni. of Agriculture, Yun Nan – Uni. of Agriculture, GuangXi – Yun Nan Normal Uni. Uni. of Education, Hanoi – Yun Nan Normal Uni. Phuong Dong Uni. Hanoi – Ethnology Institute, Guang Xi Thai Nguyen Uni., ThaiNguyen – Guang Xi Institute of Education – Uni. of Agriculture, Guang Xi – Uni. of Agricultre, HuaNan Uni. of Education, Ho Chi Minh – Guang Xi Institute of Education City – Guang Xi Normal Uni. – Yun Nan Normal Uni. Uni. of Medicine, Hanoi – Guang Xi Normal Uni. – Nan Ning Institute of Education – Ethnology Institute, Guang Xi – Guang Xi Uni. of Medicine Danang Uni., Da Nang – Ethnology Institute, Guang Xi Duy Tan Uni., – Wuyi Uni., Jiang Men Uni. of Mining and Geology, Hanoi – Wu Han Uni. of Geology – Beijing Uni. of Geology – China Uni. of Geology Uni. of Industrial Fine Arts, Hanoi – Guang Xi Uni. of Fine Arts and Crafts Hanoi Uni. of Civil Engineering, – TongJhe Uni., Shanghai Hanoi (Personal communication, MOET, 2004)

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Acknowledgements The author would like to acknowledge the comments on an earlier draft by Huang, Futao and the assistance of Dr Y.E. Lin, formerly of the Research Institute of Higher Education, Hiroshima University, Japan. Thanks are also due to its Director Professor A. Arimoto, for the invitation to spend time at the Institute, while this project was being completed. My thanks to Dr. Yang, Rui, of Hong Kong (formerly Monash) University, and Dr G. Postiglione for his comments, to Dr Harashid Haron, at the University of Sains Malaysia (USM), and to officials in MOET and the China Scholarship Council. Thanks too to Mr Cai, Hong Xing, and Ms Zhang, Zhen, PhD candidates of the Faculty of Education and Social Work, the University of Sydney.

4 International Financial Centres in Asia: Contest, Competition and Possible Trajectories1 Darryl S.L. Jarvis

Introduction “Money makes the world go around” according the popular cliché of the 1968 film classic, Cabaret. Perhaps more to the point, of course, is that money going around the world makes money, indeed great fortunes for those international financial centres (IFC) able to interdict the vast sums of fast moving money. For the winners, the pickings are lucrative and getting larger. By one estimate, for example, the value of the stock of wealth held offshore now stands at US$41 trillion dollars, up from US$6 trillion a decade earlier and continuing to grow (Hampton and Christensen, 2002: 1657; Bailly, 2008). Similarly, the volume of cross-border capital flows have expanded on average at 14.2% annually since 1980, up from US$500 billion to US$8.231 trillion in 2006–2007 – an eightfold increase since 1990 alone. And total cross-border investments now stand at a massive US$74.5 trillion (Farrell et al., 2008: 13–15). All this, however, is dwarfed by the daily turnover in traditional foreign exchange markets which currently stands at US$3.21 trillion or US$3,254 trillion annually (BIS, 2007: 1). Indeed, if the daily turnover of non-traditional derivative products is added to the mix (US$2.1 trillion), then total daily turnover in foreign exchange markets now runs at a staggering US$5.31 trillion (BIS, 2007: 4). Little wonder that there is a race on, a race for the money to become what Jesse Poon (2003) describes as one of the “control centres of global financial flows”; an international financial centre. In Asia the race is wide open, with the region currently lacking “a single dominant financial hub” (Farrell et al., 2008: 15). While Tokyo and Hong Kong have traditionally been the dominant players, the rise of China, flux in the 123

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institutional architecture of Tokyo’s financial apparatus, consolidation in Singapore, and the addition of several other contenders from South Korea to Labuan, have added to the mix and made competition intense. This chapter explores the dynamics of this competition. It does so from the perspective of attempting to map the parameters necessary to become an international financial centre, particularly the institutional, political and spatial contexts that facilitate the concentration of international financial services. Why and how financial clustering occurs and the factors that determine the location of financial centres is an important public policy concern, both for established centres eager to maintain their competitive position as well as emerging economies keen to identify the policy levers necessary to support financial sector growth. To that end, the chapter explores the experiences and strategies of three of Asia’s current contenders; Hong Kong, Shanghai, and Singapore, analysing the policy architecture, financial sector strategies, institutional mechanisms and spatial geographies undergirding financial sector growth, and the constraints, obstacles and challenges each face in developing and or consolidating their international financial centre. The chapter is organised into three sections. The first surveys the theoretical literature examining the clustering, location and spatial distribution of international financial centres. The point here is not simply to describe the literature but set in place a series of discrete explanatory models which might then be “tested” against empirical findings generated through the case studies. The second section then develops the three case studies, addressing financial sector composition and the policy and institutional mechanisms that provide the broader architecture for each of the international financial centres. Critical to the analysis in this section has been the perspectives gathered through fieldwork and interviews conducted with regulators and financial services firms. These reveal the various factors that weigh in the location and establishment decisions of financial services firms and how those firms prioritise attributes associated with specific financial centres. It also reveals the limitations and constraints that operate on public sector officials and affirms some of the theoretical explanations surveyed. Finally, the chapter attempts to identify a nominal set of criteria for assessing the likely outcomes of the competition between Asia’s financial centres, not by way of “picking a winner” but as a means of understanding the broader structural forces acting on the competitors and their likely implications.

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I

Explaining IFCs: Location, distribution and size

Financial centres can be traced back as far as ancient times. One of the oldest cities in the world, Samerkand, for example, functioned as a major commercial centre servicing the Silk Road between China and Europe (Mainelli, 2006), providing brokerage, credit and allied services to the trade caravans that plied its route. Marrakech, Babylon, Timbuktu and Constantinople too have each functioned as major financial centres at various points in time. In the eighteenth and nineteenth centuries, larger financial centres emerged to service regional and international markets as the volume of economic exchanges and their complexity increased. Cities such as Berlin, Frankfurt, Amsterdam, Florence, Hamburg, London, Milan, Paris, New York, Rome, Philadelphia, Turin, Venice, Genoa, Shanghai and Zurich, all emerged as leading centres of finance and commerce (Kaufman, 2000; Fratianni, 2007). The emergence of financial centres is commonly explained in relation to their role in financial intermediation. As Reed observes, financial centres emerge because of their ability to “balance through time the savings and investments of individual entrepreneurs and to transfer financial capital from savers to investors” (Reed, 1980: 20). Financial centres thus “perform a medium of exchange function and an interspatial store-of-value function” (Reed, 1980: 20). Some of these centres eventually evolve into international financial centres (IFCs) that possess “highly specialized functions of lending abroad and serving as a clearinghouse for payments among countries” – in other words, they evolve an ability to “effect payments and to transfer savings between places” (Kindleberger, 1974; Reed, 1980: 20). At base, IFCs might thus be understood as central places for financial capital and currency to be “collected, switched, disbursed and exchanged” (Tschoegl, 2000: 3). This latter point explains why financial centres have historically been major cities as opposed to nation-states, reflecting the role of cities as mediums of habitation that concentrate population, commercial, industrial, legal, and administrative activity (Mainelli, 2006). Common definitions of financial centres thus normally highlight their role as places of intense exchange relations which exhibit a dense clustering of a wide variety of financial businesses in one centralised location (Mainelli, 2006). Place theory While the role and functionality of IFCs is relatively uncontested in the literature, less so are the explanatory models explaining their location and the determining variables responsible for their size and spatial

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distribution. Here the literature is split between four separate but related schools of thought. The first reflects a long tradition of spatial analysis and explanatory variables such as hinterland proximity, geographic clustering and scale economies to explain the size, distribution and services composition of IFCs. Much of this literature has a distinctly geographic-theoretical lens, where the geography of space explains the bespoke configuration of financial centres, their size, distribution and their relationship to the economic hinterlands they service (Bertaud, 2004). Place theory famously developed by Walter Christaller (1966), for example, explains urban hierarchies as a function of their inequalities. These result as a consequence of the differing efficiencies to which goods can be supplied to markets relative to the distance that consumers need to travel to acquire them. In Christaller’s thesis, goods have differing “thresholds”; the higher the value of the good the higher is the “range” or maximum distance consumers are prepared to travel to acquire the good. This inverse relationship between the “threshold” of goods and the “range” tolerance for purchasing them thus produces a spatial configuration of urban centres that disburses them hierarchically relative to the value order of the services and goods they produce. In Christaller’s thesis, this produces distinctive spatial patterns with a relatively small number of large urban centres producing high order goods and services separated by wide distances while numerous smaller urban centres producing lower order goods and services are separated by smaller distances (Neal, 2008). Likewise, as the size of an urban centre grows and the volume of high order goods and services it produces intensifies, the economic thresholds of the urban centre increases, in the process changing the absolute size of the economic hinterland it services and the spatial dynamics of adjacent urban centres. World cities Strands of place theory can also be observed in more recent literatures that attempt to explain the formation, spatial and hierarchal distribution of financial centres. The “world cities literature”, for example, as Jessie Poon (2003) notes, sees a global urban landscape … dominated by a small number of cities that are distinguished by their higher order functions of control and coordination of global economic flows. These cities are pivotally arranged in a hierarchical network of trade, investment, financial, and even government transactions, and are respon-

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sible for creating value up and down the global economic chain (Poon, 2003: 136–137). In the case of the world cities literature, the hierarchical distribution of IFCs is differentiated between “world cities” and “global cities”; the latter creating a super-hierarchy (London, New York and Tokyo) who produce super-high order services that have a global financial hinterland. As Siskia Sassan (1999) notes, the transformation of global capital markets is shrinking “nationally based financial operations” and causing clustering up the value chain, which, in turn, is creating a series of dominant global players. The spate of deregulation of national financial markets since the 1970s coupled with the effects of deepening globalisation has, ironically, produced an asymmetrical process that sees the emergence of yet more international financial centres and “world cities” but where the acute agglomeration of financial activities clusters around fewer megafinancial centres or “global cities”. As Sassan observes, by the end of the last century, just … 23 cities controlled 83% of the world’s equities under institutional management and accounted for roughly half of global market capitalization (around $20.9 trillion). Six or seven cities head the league; London, New York, and Tokyo combined hold a third of the world’s institutionally managed equities and account for 58% of the global foreign exchange market (Sassan, 1999: 77). Scale economies Allied approaches explain international financial centres and financial clustering as a function of scale economies. Clustering arises from the efficiency gains and reduction in costs associated with financial agglomeration, where the density of financial service firms not only reduces barriers to transaction facilitation but creates information symmetries and knowledge economies that reduce operating and transaction costs. Clustering, for example, produces allied markets and agglomerates skills capacity in financial management, engineering, legal and settlement systems which reduces collective industry costs and allows competition in the provision of services because of market size and specialisation. It also provides employment pools of highly-skilled labour that would otherwise require large upfront sunk costs for training and skills development. Further, scale economies and clustering allows for the emergence of trust relationships and of transactional norms that become institutionalised. Issuers of securities, project financiers, underwriters and insurers of

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structured financial products, for example, are able to orchestrate pools of capital, mediate transactions and secure outcomes with relatively low transaction costs in expedited timeframes. Similarly, scale economies allows for the commoditisation of risk and for risk to be spread and on-sold between multiple agents who operate in specialised markets, further reducing transaction barriers. The effects of scale economies combined with functional specialisation is also used to explain the contrasting sizes, distribution and capacities of IFCs. London and New York’s scale advantages in foreign exchange, international bonds and the depth of their capital markets dwarf the capacities of other European (Paris, Frankfurt) or North American (Toronto, Chicago) financial centres producing self-reinforcing comparative advantages that deepen specialisation and centralisation and further enhance capacity and their spatial reach over a global financial hinterland. Size, in other words, rather than distance is what matters and orders the distribution and hierarchy of London and New York as dominant actors in global capital markets (Poon et al., 2004: 414). The pull of centralisation through scale economies and specialisation obviously has explanatory limitations, however. By this logic there should be fewer but larger global financial centres with the tendency for regional, smaller financial centres to be made redundant. As Sassan (1999), Tschoegl (2000) and Taylor et al. (2002) among others observe, however, two counterpoising trends are evident; centralisation and the emergence of a small number of dominant “global” financial centres (London, New York, Tokyo – the “global three”) but concomitantly the emergence of an increasing number of smaller regional financial centres. In the Asia-Pacific, Sydney, Singapore and Hong Kong have each prospered and grown despite the scale economies enjoyed by the global three – an apparent anomaly. What explains this? Theorists like Parr (1978) emphasise the role of decentralisation and fragmentation in financial globalisation that results in the emergence of bespoke relationships between similarly sized regional financial centres. Regional financial centres thus become important and prosper precisely because they deepen financial intermediation, connecting regional hinterlands into a global financial value chain. Others like Poon et al. (2004) highlight a combination of developments in communications technologies and outsourcing of lower value adding services that fosters decentralisation and spurs the development of regional financial service centres. These centres enjoy their own knowledge economies, providing niche specialisations that address the needs of localised markets and broker financial relationships between

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regional hinterlands and the global three. Singapore and Hong Kong, for example, have specialised knowledge economies that serve Chinese business in both mainland China and the sizable Chinese diaspora throughout Southeast Asia. Sydney, by contrast, has specialised knowledge economies in local swap markets (Poon et al., 2004: 414–415). Finally, decentralisation literatures point to the rapid modernisation of developing economies over the last several decades and the emergence of localised demand for financial intermediation and specialist financial services. Dubai, Qutar, Beijing, Mumbai, Shanghai, Shenzhen and San Paulo, among others, display nascent economic developments in their immediate hinterlands and the deepening requirements for economic and financial complexity – not least the need to develop intermediating centres to tap into global financial networks and access and distribute capital (Farrell et al., 2008: 63–68; Poon et al., 2004: 414–415). Beyond space: Endowed capacities Spatially bounded theoretical literatures have held a dominant sway in explaining the location, size and distribution of financial centres. More recent literatures, however, question their validity. As the Financial Times noted, “Banking is rapidly becoming indifferent to the constraints of time, place and currency” (as quoted in Harvey, 1990: 161), largely as a result of advances in communications technologies and the emergence of dependable instantaneous real-time telecommunications networks. For many theorists, such developments represent the “obliteration of space” (Harvey, 1990; Lash and Urry, 1994) as a determining variable in the location, distribution and size of financial centres (Krstic, 2004: 127). A nascent fourth literature has thus emerged which addresses the endowed capacities necessary to support the emergence and development of a financial centre. This literature speaks to the physical, institutional, policy and knowledge environments that support the location decisions and thus clustering of financial services firms – and multinational corporations more generally (Zhao et al., 2005). Sagaram and Wickramanayake (2005), for example, identify five key factors that influence the location decisions of financial services firms, including (i) a favourable regulatory regime, (ii) competitive taxation structure, (iii) the presence of various socio-cultural factors like quality of the living environment for attracting and retaining talent pools, (iv) the presence of financial variables including critical market depth and sufficient turn-over volume, and (v) the existence of sufficient levels of economic activity as a means of undergirding a viable commercial banking sector. Tschoegl (2005) also includes variables like access to quality infrastructure such as

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telecommunications and aviation networks and the role of politics both in terms of political stability but also policy stability and domestic institutional adaptability (Tschoegl, 2000: 9–15). Other theorists like Wang et al. (2007) and Porteous (1995) extend the notion of knowledge economies and highlight the role of soft-institutional structures and social networks that intermediate knowledge transfer and information flows and, in combination with the formal regulatory and institutional structures, create information economies that broker the orderly dissemination of information and create information transparencies necessary to the functioning and efficient operation of financial markets. Competing literatures These four literatures represent related but competing explanations of the location, size and distribution of international financial centres. They also imply very different roles, capacities and strategies for governments eager to develop and or consolidate their financial centres. The endowed capacities literature, for example, implies the possibility of deliberative public policy creating the institutional and infrastructural environment able to evolve an international financial centre. The place theory, world cities and scales economies literatures, on the other hand, suggest a more marginal role for government, constrained by spatial processes associated with the presence of trade routes, various historical antecedents and the importance of first mover advantage. The following sections attempt to disentangle these issues by exploring the historical and institutional contexts associated with the evolution and operation of three international financial centres: Hong Kong, Shanghai and Singapore.

II Hong Kong, Shanghai and Singapore: Financial sector composition, institutional and policy contexts Hong Kong Hong Kong has emerged as one of the world’s leading financial centres. It is currently Asia’s second largest stock market (after Japan), the world’s sixth largest foreign exchange market, has one of the world’s four largest gold markets, is the second largest funds management centre in Asia and ranks as the 12th largest international banking centre in external assets (HKMA, 2008; Dong et al., 2006: 22). Beyond its formal banking sector, Hong Kong has also emerged as one of the region’s foremost money and debt markets, derivatives (futures) markets, silver and gold markets, asset management centres

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and operates as one of the most open insurance centres in the world (HKMA, 2008).2 Established in the nineteenth century as a British colony and a trading entrepôt to service the lucrative market between the West and China, Hong Kong’s fortunes have always been reliant on international trade and finance and on its relationship to China more generally (Schenk, 2002: 232).3 While Shanghai dominated international finance in the Far East in the early twentieth century, civil war and economic chaos in China throughout the 1930s and 1940s witnessed the emergence of Hong Kong as the region’s foremost financial enclave. As Catherine Schenk observes, “the local traditional banking sector in Hong Kong thrived on the chaos in China”, benefiting from an influx of Chinese political and economic émigrés, the relocation of Western business headquarters out of Shanghai, and massive capital in-flight as a result of Chinese hyper-inflation between 1947–1949. Shanghai’s losses were Hong Kong’s gains, with the colony enjoying the swelling talents of mainland émigrés who bought with them social and business networks that made the colony an intensely networked banking community – or what Meyer describes as the “pivotal intermediary hub” of Asia’s “social networks of capital” (Schenk, 2002: 323–325; Schenk, 2000: 746–751; Li, 2004: 1; Meyer, 2000: 242). In the post-war period, Hong Kong’s rapid industrial development coupled with its entrepôt status witnessed huge increases in demand for banking services and expansion of the financial services sector (Jao, 1974: 18; Schenk, 2002: 340). By 1954, for example, Hong Kong had 94 licensed banks and hosted some 19 foreign banks, and between 1954 and 1972 witnessed massive expansion in the deposit base of its commercial banks, growing from HKD$1,068 to HKD$24,613 million (Jao, 1974: 23). Yet by far the single most important source of Hong Kong’s advantage as a financial centre from the 1940s through to early 1970s was its free exchange market (Schenk, 2002: 332; Liu, 1997: 583–588). While the international system operated mostly under the Bretton Woods set of agreements with limited currency convertibility and a fixed peg exchange rate system, as a British colony Hong Kong enjoyed full access to the “sterling area” comprised of commonwealth countries (except Canada) who pegged their currencies against sterling (Schenk, 2002: 332; Jao, 1974: 17). The arbitrage to be had from servicing this market coupled with the rapid increase in demand for foreign exchange to satisfy other trading requirements, created a parallel exchange market for Hong Kong dollars (HKD) and, in turn, their exchange into sterling and US dollars (Schenk, 2002: 332; Ghose, 1987:

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22–29).4 Hong Kong became a “a lucuna in the otherwise closely controlled Bretton Woods system”; cementing its reputation as a “money city” where deals, finance, exchange and trade made for the lifeblood of the colony (Schenk, 2002: 333). More recently, Hong Kong’s fortunes have again rested largely on developments in China, particularly the mainland’s opening to the West and the marketisation of its economy. A combination of deepening demand for debt raising, equitisation and IPOs, the privatisation of state-owned enterprise (SOEs), rapidly expanding China–West trade and accelerating demand for mainland banking services, has witnessed an allied expansion of Hong Kong’s financial services sector. Hong Kong thus now boasts some 202 licensed banks, restricted licensed banks and deposit taking companies and a total of 145 fully licensed foreign banks. Of the top 100 banks in the world, 69 have an operational presence in Hong Kong and 82 foreign banks have representative offices. Hong Kong’s banking sector thus now displays a diverse and matured set of commercial activities ranging from traditional retail deposit taking, wholesale banking, securities brokering, trade finance, treasury activities and precious metal trading (HKMA, 2008). Indeed, the importance of financial services to Hong Kong has seen it designated a “pillar” industry in recognition of its role as a key driver of employment and economic growth, with financial services contributing 23% of revenue from corporate income tax and fully 12% of Hong Kong’s economic output (Dong et al., 2006: 22; Cheung and Yeung, 2007: 5–7). Institutional and regulatory contexts While Hong Kong’s fortunes clearly reflect its legacy as a entrepôt trade hub and its relationship to China, no less important to its success as a financial centre has been the institutional and regulatory architecture supporting business, transaction facilitation, clearing and settlement systems, and the system of regulatory oversight. Indeed, despite its reputation as a “free city” and what Owen described as “unique in its correspondence to the classical economists dream world which existed in the golden age before 1914” of laissez-faire, Hong Kong’ s policy architecture more accurately reflects a position of “positive non-interventionism … [as] a deliberate policy choice rather than merely an absence of policy” (as quoted in Schenk, 2002: 322). The difference is a subtle one and underscores a policy culture that prides itself on a “light touch” approach to regulatory oversight but set amid a firm belief in the value and necessity of strong institutions as the guardians of mar-

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ket functionality. Hong Kong’s financial services sector has thus witnessed an evolution in its institutional forms and regulatory approaches with several significant reforms since the 1960s (Tan and Lim, 2007: 19). These culminated in the adoption of a prudential supervisory system based on risk management in support of bank safety and soundness with oversight authority vested in the Hong Kong Monetary Authority (HKMA) established in 1993. As the peak institution responsible for financial sector oversight, the HKMA is charged with maintaining monetary and banking stability, continuity, bank safety, the stability of the Hong Kong dollar, and “developing Hong Kong’s financial infrastructure to enable money to flow smoothly, freely and without obstruction” (HKMA). Clearly, its role is more than that of a simple regulator as revealed in its charter objectives; “to enhance the efficiency, integrity and development of the financial system, particularly payment and settlement arrangements” (HKMA). As one senior supervisor in the Banking Supervision division of the HKMA commented, “our role [the HKMA] is part supervision, part oversight, part audit, but essentially we are here to help grow the financial sector in Hong Kong and make it attractive as a centre to conduct business … What we do is make sure that things work and try and anticipate problems that might cause things to go wrong so that we protect our [Hong Kong’s] reputation as a place of business” (interview, October, 2007).5 Similar supervision and market promotion institutional arrangements are in place for Hong Kong’s securities, futures and equities markets. The Securities and Futures Commission (SFC), for example, has oversight responsibilities for securities trading, leveraged foreign exchange trading, futures products and contracts, various investment products offered to the public, asset management, financial services licensing, as well as regulatory oversight of “Hong Kong Exchanges and Clearing Limited (HKEx)” and the listing regulations for the HKEx (Securities and Futures Commission, 2009). At the same time, its lead mandate is “to ensure Hong Kong’s continued success and development as an international financial centre”, in part through ensuring efficiency and innovation in the support infrastructure offered through clearing, settlement and payments systems and regulatory efficiency generally. Similar regulatory and institutional structures are in place for the insurance and precious metals markets (see Table 4.1 for an overview of financial services sector and regulatory architecture in Hong Kong). Apart from the formal institutional regulatory bodies Hong Kong has also evolved what Cheung and Yeung (2007: 26) describe as “soft

Hong Kong financial centre: Banking sector and financial sector composition

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Table 4.1 Sector

Composition

Structure

Description

Regulator

Banking

– 142 Licenced Banks – 29 Restricted Licence Banks – 30 Deposit taking companies – 82 representatives offices of foreign banks

Three-tier system of deposit taking institutions: i) Licenced Banks ii) Restricted Licence Banks iii) Deposit taking companies

Only licenced banks able to operate current accounts and accept deposits of any size/maturity

Hong Kong Monetary Authority (HKMA)

Designated as Authorized Institutions (AIs) and subject to the “Banking Ordinance” AIs may operate as either locally incorporated companies or branches of foreign banks

AI’s subject to the provisions of the “Banking Ordinance” requiring them Restricted licence banks to i) Maintain adequate principally engaged in liquidity and capital merchant banking & adequacy ratios; ii) Submit capital market activities; may accept deposits of any periodic statistical returns to HKMA; iii) Adhere to maturity above limitations on loans HK$500,000 determined by the “Banking Deposit taking companies Ordinance”; iv) Seek HKMA predominantly owned by licenced banks; restricted to approval for appointment of directors, chief taking deposits above executives, changes in HK$100,000 with minimum maturity of three governance Overseas banks which months operate as “branches” are not required to hold capital in Hong Kong and are not subject to capital adequacy ratios or capital-based limits in large exposures Depositors protected via “Deposit Protection Scheme”

Table 4.1

Hong Kong financial centre: Banking sector and financial sector composition – continued

Sector

Composition

Structure

Description

Regulator

Foreign Exchange Market

Open (various participants and mediators: wholesale and retail)

Absence of exchange controls (free market)

Hong Kong operates an open foreign exchange market marked by the absence of exchange controls

Hong Kong Monetary Authority (HKMA)

Linked to leading international foreign exchange markets around the world Linked Exchange rate system of Hong Kong dollar to US dollar

Settlement systems stipulated via the “Clearing and Settlement Systems Ordinance” with specified settlement systems for specific instruments under the “Central Moneymarkets Unit” of the HKMA. These include: i) Hong Kong dollar Clearing House Automated Transfer System ii) Continuous Linked Settlement (CLS) System iii) Euro Clearing House Automated Transfer System iv) US dollar Clearing House Automated Transfer System v) Renminbi Clearing House Automated Transfer System

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Hong Kong financial centre: Banking sector and financial sector composition – continued

136

Table 4.1 Sector

Composition

Structure

Description

Debt market

Open pool market

Daily turnover averages HK$48.4 billion

One of the largest and most Central Money Market Unit liquid debt markets in the Service (CMU) established region. in 1990 under the auspices of the HKMA provides clearing and custodian system for the exchange of bills and notes

Inter-bank market

Hong Kong Interbank rate determined by supply/demand for funds between market players.

Money market

Utilised by institutions at the wholesale level

Regulator

Hong Kong Monetary Authority (HKMA)

Lead indicator of the price of short-term funds Equities market

Hong Kong Exchanges and Clearing Limited (HKEx) (private listed company but empowered with listing approvals and registration, audit and compliance of registered companies) Non-restricted and open trading platform subject to compliance with the rules and requirements of the HKEx Interlinked with various global bourses to enable trades on multiple exchanges

– Securities market – Derivative and futures – market

Comprised of a securities and futures/derivative market Provides full Clearing and Settlement Services, Depository & Common Nominee Services Trading Mechanism

Securities and Futures Commission (SFC): Facilitates and encourages participation in the Hong Kong markets; formulates regulatory policy and compliance requirements; regulates approved share registrars; oversees investor compensation funds; responsible for transparency and rectitude of markets and information symmetries; works with the HKEx and clearing houses to ensure transactional efficiency, systems innovation and product development

Table 4.1

Hong Kong financial centre: Banking sector and financial sector composition – continued

Sector

Composition

Structure

Description

Regulator

Precious metals market

The Chinese Gold and Silver Market (founded in 1918).

Open platform subject to participant registration for clearing and settlement purposes

Enjoys key position in the international gold market

The Chinese Gold and Silver Exchange provides a trading place, facilities related services to its members for gold, silver and precious metals transactions; establishes and implements rules and regulations, and normalises precious metal transactions; oversees the transaction process, settlements and delivery arrangement; designs trading contracts and regulations, monitors the fulfilment and completion of the contract.

Asset management

Assorted wealth and asset management companies

Institutional fund management Portfolio management Personal wealth management Unit trusts and mutual funds

One of the largest asset management centres in Asia; regional centre for portfolio management activity

Subject to oversight by the HKMA and normal listing/registration requirements.

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Hong Kong financial centre: Banking sector and financial sector composition – continued

Sector

Composition

Structure

Derivatives market (Futures)

Hong Kong Futures Exchange (HKFE) and Stock Exchange of Hong Kong (SEHK)

Transactions on the two exchanges cleared/settled via the Hong Kong Securities Clearing Company (HKSCC) and the Stock Exchange of Hong Kong Options Clearing House Company (SEOCH) and the Hong Kong Futures Exchange Clearing Corporation (HKCC)

Derivatives market composed of three types of futures: i) Index futures; ii) Stock futures; iii) Interest rate futures Insurance

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Table 4.1

Open non-restricted participation subject to approval of the Insurance Authority.

181 authorised insurers (90 incorporated in Hong Kong). Sector mainly composed of large, international insurance companies (retail and reinsurance).

Description

Regulator

Marine, aviation, insurance on structured financial products, retail, life, health; reinsurance

Office of the Commissioner of Insurance (OCI) heads Insurance Authority (IA). Mandated by the Insurance Companies Ordinance which allows for the prudential supervision of all insurance business operating in Hong Kong regardless of the place of incorporation OCI responsible for development of policy and prudential regulatory measures

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infrastructure”: a complex web of informal and semi-formal norms, procedures and practices (many of them ensconced in professional bodies/societies) that operate around corporate governance standards, insolvency procedures, securities regulation, accounting and audit bodies, disclosure and transparency practices – among others – and which broker the flow and orderly distribution of information necessary to the functioning of high capacity markets and the regulatory and institutional practices that support them. Arner and Norton (2000: 310) identify these as the tapestry of “cultural traits” unique to Hong Kong and in large measure responsible for its innovative business environment and the competitive advantage it has enjoyed historically. Hong Kong’s social and professional networks are what makes its financial markets work. Complex professional and social relationships disseminate, mediate and transact information and create information symmetries beyond formal organisational boundaries or institutionalised market rules (Dubini and Aldrich, 1991). In turn, such networks enhance regulatory efficiency, creating networked forms of governance that evolve implicit standards, norms and practices that serve to increase regulatory and market transparency, lower transactions costs and thus the intensity of financial transactions. As Karreman and van der Knaap (2007: 5–7) note, financial activity and financial service firms tend to concentrate around environments with high information symmetries; an attribute that has historically made Hong Kong a primary destination for financial services firms establishing in Asia. Indeed, Hong Kong’s highly evolved networks are alluded to in various conversations with finance professionals. A senior executive responsible for identifying market opportunities and business development with a large British bank, for example, noted that “in Hong Kong when you plug into the right people its amazing … word gets out and whatever you need people suddenly get back to you to close it … Its the easiest place I have ever worked in terms of information and contacts” (interview, June, 2008). Similar sentiments were expressed by a senior banker with an American financial institution who noted that “in Hong Kong your networks are everything … because then it happens … you get to know what is going on and they know about you … Just a few phone calls and the word is out and what I need I can get quickly…” (interview, June, 2008). The head of corporate strategy of a large West European Bank confirmed these observations, noting that Hong Kong is “unique, its networked to everywhere in China and back again!” (interview, June, 2008).

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Shanghai Shanghai’s institutional and regulatory contexts, by contrast, belie a very different history. In 1949 Shanghai was Asia’s leading financial centre hosting 24 state banks, some 200 private lending, trust companies and financial institutions, and hosted the world’s third largest stock market behind New York and London (Laurenceson and Tang, 2005: 147). For more than a century, Shanghai had been the “modern crucible of China” and played a prestigious role as one of China’s five “open cities” stemming from the Treaty of Nanjing in 1842 (Lai, 2006: 3). Its historical success and reputation, however, became its liability under communist rule, with Shanghai inextricably associated with capitalist excesses and a humiliating semi-colonial past. When Shanghai re-emerged in the late 1970s it was a mere shadow of its former self; no longer a financial hub but transformed into what Wu describes as the “locomotive of state-led industrialization” – the industrial cash cow of Beijing (Wu as quoted in Lai, 2006: 3). Apart from the obliteration of the formal regulatory apparatus and institutions responsible for oversight of free market transactions, Shanghai’s general support infrastructure was abysmal. As Jao notes (1974), “when foreign banks and business firms were again welcomed back in the early 1980s, they found that even basic facilities, such as office buildings and telephones, were lacking”. In a word, conditions were “harsh” with Shanghai lacking “decent housing … supermarkets, international schools, social clubs, cultural centres, [and] concert halls”; all the soft goods necessary to attract and retain pools of high-skilled human capital (Jao, 1974: 29, 32).6 Shanghai’s changing fortunes began in the 1980s, spurned by a combination of political calculation and economic ambition. An emerging consensus in Beijing recognised the changing nature of the global economy and of China’s need to integrate itself into the international commercial system with Shanghai “deemed strategically important for China to succeed on the international stage” (Lai, 2006: 4). Shanghai would again be China’s window to the world. Subsequently, the city was nominated as one of 14 open coastal cities in 1984, partly reflecting its strategic location on the Yangtze River Delta and its role as a transportation gateway to central and northern China. Not until 1991, however, was Shanghai’s status cemented. Deng Xiaoping’s statement that “Shanghai was a financial centre in the past and was the place where currency was convertible” and that “in the future Shanghai should still be the same” (as quoted in Xu, 2007: 1), henceforth ear marked the city for special treatment and semi-autonomous political and economic rule.

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Shanghai’s fortunes were now inextricably linked to Beijing’s vision for China’s rapid transformation. At the 14th Congress the city’s central role in this vision was announced: to open “Shanghai Pudong, and to build Shanghai as the dragon head and one of international economic, finance, and trade centres, so as to drive the growth of the [Yangtze] River Delta and in turn the take-off of the whole economic region” (as quoted in Lai, 2006: 4; Xu, 2007: 1). The 11th Five Year Plan laid down the blueprint for Shanghai’s redevelopment; a three phase strategy designed to grow Shanghai as a hub of trade, finance, tertiary services and transportation. In the first phase, Shanghai would establish and consolidate its role as a national financial hub and transportation gateway to central and northern China, a hinterland of some 800 million people. To achieve this, Shanghai would be insulated from intra-national competition and provided with national resources for the development of its physical infrastructure, most of which would be concentrated on the development of the “Pudong New Area”. Within Pudong, four new zones would be developed, the most important being the Lujiazui finance and trade zone immediately opposite the Bund – the old city centre and former financial sector (Meyer, 2000: 234–235; Lai, 2006: 7).7 Allied with this, national authorities would roll out regulatory, institutional and liberalisation measures to undergird domestic financial intermediation and financial sector development (Meyer, 2000: 234). Second, authorities would consolidate Shanghai’s position as a regional financial hub through attracting ever greater numbers of financial services firms and multinational enterprises. As Wu (1999: 214) notes, Shanghai was designed to become China’s Wall Street, an “international landing strip to attract foreign finance capital” (Lai, 2006: 7). And third, authorities would champion Shanghai’s emergence as an international financial centre through the progressive consolidation of the sector. Institutional and regulatory contexts of Shanghai’s emergence as a financial centre Unlike Hong Kong, Shanghai’s financial sector development has been a process of institutional, regulatory and market design from the ground up. Strict comparisons between the two cities are thus made difficult because of the low base from which Shanghai is emerging and because of the rapid change and innovation evident at all levels of the institutional-regulatory spectrum. Indeed, attempting to map the regulatory environment or the strategy and drivers undergirding Shanghai’s financial centre proves a challenging task. Much of this is

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explained by the fact that Shanghai’s financial sector development is not its own but reflects a national development strategy substantially controlled by Beijing. As Lai notes, this makes for a “complex relationship between state and market imperatives in the urban and economic transformation of the city” with the state playing a “key role in determining the timing, pace and economic and spatial configuration of Shanghai’s development” but where market requirements and the practicalities of financial sector governance create tensions between national objectives and local needs. Adding to this mix is the “rescaling of governance as greater financial and political power is transferred from the central state to the local municipal government” but in a process that is not always contiguous, consistent or predictable (Lai, 2006: 2). Despite this, the broad construction of market institutions and ongoing financial innovation have been an obvious feature of Shanghai’s rapid financial sector development. This commenced in 1990 with the establishment of the Shanghai Securities Exchange (at that time one of only two in China – the other located in Shenzhen) but under tightly controlled listing, trading and access rules that favoured state-owned enterprises (SOEs). Market participation was restrictive and onerous trading rules made for thin volumes with little scope for significant capital raising. Beijing responded by creating an “A” and “B” share registry in 1991, allowing SOEs and large Chinese enterprise to tap foreign investor capital by issuing “B” shares (to a maximum of 49% of total issued capital) while preserving Chinese majority ownership and managerial control. These initial efforts, however, did not produce the kind of rapid financial sector development Shanghai municipal elites had hoped for. Beijing ‘s historical xenophobia, concerns about a domestic political backlash as well as vested interests in the Chinese banking system, made for an often cumbersome and incremental approach to marketisation that left numerous obstacles in place to foreign participation in the sector (Meyer, 2000). By the end of the decade, Shanghai’s appeal as a financial hub thus displayed only modest success, with the city managing to attract 41 major international banks and 119 financial service firms – a mere 30% of the foreign banks then operating in China (Lai, 2006: 9; Meyer, 2000; Wei, 1999). After 2001 the pace of reform accelerated. China’s entry into the World Trade Organisation and an agreed timetable for financial sector liberalisation combined with rapid growth in demand for more financially complex instruments and trading platforms, witnessed accelerated liberalisation and market innovation. In quick succession, Beijing rolled out a series of market institutions such as the establishment of a

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foreign exchange trading centre, RMB bonds trading centre, inter-bank loans centre, as well as gold and futures exchanges. As a result, the city’s market density was rapidly transformed, with Shanghai enjoying one of the most concentrated periods of growth and new business arrivals in its history. By 2007, for example, the number of financial institutions in the city had swelled to 563, including 105 major foreign banks while the number of registered firms with foreign capital increased to over 25,000 – up from 3,635 in 1992 (see Table 4.2) (Shanghai Statistics, 2008). Shanghai’s contribution to China’s national economy also grew, with the city now generating 5% of China’s GDP, 8% of the nation’s industrial output, and handling 26% of the nation’s exports through its ports, while attracting 10% of all FDI into the country (Laurenceson and Tang, 2005: 153; Shanghai Statistical Yearbook, 2007). While market density is an obvious feature of Shanghai’s financial sector development, the regulatory and institutional environment supporting its maturation is more confused. Regulatory obfuscation and a lack of regulatory transparency and continuity are marked features of the financial sector environment. As Jonathan Anderson, UBS’s Chief Asia economist notes, “we can’t think of a single topic that raises more questions, misconceptions and debate than the state of the Chinese banking system” (Anderson, 2007). Much of this arises from the rapid rate of development of regulatory systems, where emerging mandates or juridical responsibilities have created institutional stresses, regulatory confusion or, in some instances, regulatory competition. Since 1995, for example, the Central Bank Law has progressively transformed the People’s Bank of China (PBOC) from one of three banks in the country’s pre-1979 mono-banking system into its central bank. As a result, PBOC has been forced to shed its lending functions other than to commercial banks, restrict its commercial practices to trade in government bonds, and is no longer permitted to issue guarantees other than through directives issued by the State Council. PBOC’s new mandate involves oversight of bank capital adequacy ratios, audit and compliance functions, oversight of payment, settlement and clearing systems, as well as determining interest rate policy. At the same time, however, PBOC enjoys only limited autonomy in the discharge of its regulatory mandate compared to its international counterparts. Despite its central bank status, PBOC continues to be directly accountable to the State Council, where regulatory decision making and monetary policy is ultimately determined (Wei, 1999: 38). Such a radical re-designation of the bank’s role, functions and responsibilities, as well its circumscribed independence, have placed serious stresses on the bank’s internal culture and

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Table 4.2

Evolution of financial services sector in Shanghai: 1990 to 2007

Financial Institution/Market Innovation

Established

Content

National Market Share and or Status

Shanghai Securities Exchange

1990

Main capital market (equity, bonds); Shanghai Stock Exchange (SSE)

80% of total trading turnover of China

Shanghai Securities Exchange allowed to list “B” shares

1991

Issued by large SOEs targeted at foreign investors, denominated in local currency but trades in US dollars

“B” shares limited to 49% of total issued capital of SOEs and other enterprises. Designed to tap the foreign investor market while maintaining Chinese control over SOEs and related enterprises

Foreign Exchange Trading centre

1994

Foreign exchange

Main vehicle for foreign exchange (FX) markets in China & Head office for national trading

Inter-bank loan centre

1996

Money market

National centre for inter-bank trading

RMB bonds trading centre

1997

Money market

National centre for bond trading

Citicorp enters retail banking sector in China

1997

Single branch in Bund, retail banking

Number of branches restricted by Chinese authorities and financial activities require approval

Foreign financial institutions allowed to conduct local currency business in Renminbi

1999

Wholesale banking, structured products, limited retail banking

Only foreign financial institutions with branch assets above US$150 million allowed to operate

Shanghai Futures Exchange

1999

Rubber, copper/aluminum/fuel oil

60% of all futures trading volume in China

Table 4.2

Evolution of financial services sector in Shanghai: 1990 to 2007 – continued

Financial Institution/Market Innovation

Established

Content

National Market Share and or Status

China joins World Trade Organisation

2001

Shanghai Gold Exchange

2002

Gold market

Only gold market in China

Note market service centre

2003

Note transaction information and service

Principal note pricing system in China

Shanghai Municipal government announces Action Plan to develop Shanghai as an International Financial Center (IFC)

2004

Plan consists of a strategy target of five years for foundation building; ten years for regulatory framework construction; twenty years to realise status of Shanghai as an international financial centre.

People’s Bank of China (PBOC) establishes a second headquarters in Shanghai

2005

PBOC recognises emergence of Shanghai as the country’s preeminent financial centre.

Shanghai petroleum market

2006

Futures transactions

Only petroleum futures market in China

China financial futures Exchange

2006

Financial derivatives transactions

Only derivative market in China

China agrees to timeframe for the liberalisation of financial sector and greater foreign participation

Source: Adapted from Xu, Mingqi (2007), “Building Shanghai International Financial Center: Strategic Target, Challenges and Opportunities”, Paper presented at the PECC International Conference “Competition among Financial Centers in the Asia-Pacific: Prospects, Benefits, and Costs – Stumbling Blocks or Building Blocks towards a Regional Financial Community”, Westin Chosun Hotel, Seoul, Korea, October 15–16.

145

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capacities, creating political anomalies in the discharge of its mandate and raised questions about its regulatory effectiveness. Further regulatory confusion has also arisen with the creation of the China Banking Regulatory Commission (CBRC) established in 2003 (Barth et al., 2007). The CBRC is charged with approval authority over new banking institutions, audit of financial service firms, the formulation of prudential rules and regulations, development of early warning systems and the detection of risk in the banking sector. The juridical edges where PBOC’s mandate ends and CRBC’s begins is clearly blurred, creating what one senior executive with an American bank described as “regulatory black boxes” where “no one knows what the heck is going on and no one wants to make a decision because they don’t know if they have the jurisdiction” (Interview, June, 2007). Further, CBRC displays a “command and control” approach in its regulatory style, where black letter laws are issued regularly, much to the confusion of market participants. In the first three years from its inception in 2003, for example, the CBRC issued no less than 150 rules, or about one per week, leading one senior executive of a British bank to note “its orchestrated chaos” (Interview, June, 2007; Ping, 2006). Indeed, a recent survey by PriceWaterhouseCoopers (Metcalfe, 2007: 23) of foreign banks operating in China “ranked regulatory risk as the greatest threat” they face. As the PWC’s report noted, of all the risks ranked, regulatory risk “almost received the maximum possible score” (Metcalfe, 2007: 20). Much of this regulatory uncertainty reflects competing political interests. Shanghai’s elites, for example, generally reflect a modernising impulse and are keen to use liberalisation and greater foreign bank participation as a tool to rapidly transform China’s banking system. While similar political forces can be found in Beijing, protectionist sentiments and fears about a loss of control and influence has created a regulatory culture that at times appears antithetical to the sponsorship of Shanghai as a financial centre. In 2006, for example, in revising upwards its foreign equity ceiling on domestic bank ownership to 25% (a maximum of 20% for a single foreign institution), the CBRC simultaneously introduced restrictive foreign incorporation rules, prohibiting non-domestically incorporated banks from taking individual deposits of less than Renminbi 1 million – effectively cutting them out of the domestic retail banking sector (Garcia-Herrero and Santabarbara, 2008: 2, 23). Such developments have reinforced a four tier banking system that discriminates between domestic banking institutions, locally incorporated wholly owned foreign banks (WOFB), joint venture banks (JVB) and foreign bank branches (FBB). While WOFB’s enjoy full domestic access and operate on a similar

Darryl S.L. Jarvis 147 Table 4.3

PRC banking system

Bank Type

Licencing Requirements

Restrictions

Domestic bank

Minimum paid in capital of RMB 1 billion; minimum operating capital per branch of RMB 100 million

None. Subject to PBOC and CBRC prudential oversight

Wholly owned foreign bank

Paid in and operating capital requirements same as domestic banks

Branch and ATM network subject to approval; licencing subject to previous FBB operation of two years; has to demonstrate profitability for licence issue

Joint venture bank

Paid in and operating capital requirements same as domestic banks

As of 2006, restrictions of RMB business lifted as per the WTO timeline for liberalisation

Foreign bank branch

Minimum capital requirement of RMB 300 million

Can only accept deposits of RMB 1 million and above

Source: Jin et al. (2007) “China’s New Foreign Bank Regulations”, Asia Focus Newsletter, May, Federal Reserve Bank of San Francisco

footing to domestic banks, in practice their branch and ATM networks are restricted by CBRC approvals processes, limiting their commercial discretion (see Table 4.3). Consequently, as late as 2006 there were only four WOFBs (HSBC, Citibank, Standard Chartered, and Hong Kong Bank of East Asia), indicative of the still restrictive regulatory environment operating in China (Johnston and Parker, 2007: 31–33; Barth et al., 2007: 2). Many of these same anomalies are also apparent in the development of the soft-institutional structures, professional and technical networks, clearing and settlement systems as well as the information symmetries emerging around Shanghai’s financial sector. Central planning and the introduction of a uniform accounting system adopted from the Soviet model in the 1950s disestablished professional bodies such as accountants, lawyers and actuaries, among others. Consequently, only as recently as 1988 was the Chinese Institute of Certified Public Accounts (CICPA) established, not until 1991 were Certified Public Accountants (CPAs) certified through a merit-based examination process, and not until 1997 did the “General Standard on Professional Ethics” for CPA’s come into effect (Narayan and Reid, 2000: 41–49, 51).8 However, the

148 International Financial Centres in Asia

degree to which these professional bodies are emerging independently or developing organic capacity is problematic. The CICPA, while ostensibly an independent body, falls under the direct supervision of the Ministry of Finance (MOF) and all its policies must be approved by the MOF. These same strictures are in place for professional bodies in the legal, paralegal and actuarial domains with certification, standards and accreditation systems still overseen by state agencies. These “centralising” tendencies cast a long shadow over the emergence and possible growth trajectories of the city’s soft-institutional capacities, creating information asymmetries at odds with Shanghai’s ambitions to become a global financial centre. Even the flow of financial data and information – the life blood of a financial centre and critical to market functionality – has remained a closely protected commodity with authorities exerting monopoly control and vetting approval over content. The Xinhau News Agency, for example, the official news agency of the Community Party, has been the sanctioned agency carrying financial data and information into banks, brokerages and other financial intermediaries. External or competitor agencies like Dow Jones, Thompson Reuters and Bloomberg have been frozen out through anti-competitive practices that saw Xinhau act as both regulator over the sector and a commercial actor in the sector (see also Wang et al., 2007: 110–112).9 With the backing of Beijing, Xinhau has used onerous disclosure and compliance standards and various regulatory hurdles to effectively gate foreign operators out of the market, in the process advantaging Xinhau and allowing it to become a price setter of domestic financial data but, as a consequence, increasing transaction costs for financial sector participants. While such practices are being redressed, they betray a bifurcated rationality that, on the one hand, sees Beijing promote Shanghai as an emerging financial centre but, on the other, belies a continuing legacy to centralise control in ways that are at odds with the emergence of soft-institutional capacities and information symmetries that reduce transaction costs or provide the ability for an intensely networked financial community to emerge. Singapore Singapore and Hong Kong enjoy an historical rivalry that can be traced back to their days as entrepôt trade hubs and their British colonial status. In many senses, their experiences betray a common history but played out in different geographic and political contexts (Tan, 2001: 1). While Hong Kong’s future has reverted back to the PRC via an interim political agreement designed to ensure the former colony some level of

Darryl S.L. Jarvis 149

autonomy from Beijing, Singapore’s fortunes have been entirely its own since its independence in 1965.10 As Bryant (1985) notes, the fact of Singapore’s independence singularly explains its subsequent efforts to generate a financial services sector and propel its growth through financial activity. As a small city-state of some 239 square miles, Singapore enjoys none of the natural resources, agricultural capacities, energy or food security of its immediate neighbours. Its economy was and remains entirely dependent on its capacity to generate services and attract capital and investment. Singapore’s development has thus been defined by these vulnerabilities. In the late 1960s the government responded to these vulnerabilities by initiating a series of aggressive development policies, one important component of which concerned the development of financial services as a growth driver in its own right (Bryant, 1985: 8). The intent was not simply to grow the domestic banking capacity of the city-state but to “orient financial institutions in an outward direction, encouraging them to see their role as servicing an international rather than solely a domestic clientele” (Bryant, 1985: 8). In the late 1960s, Singapore was advantageously placed to do this. A widening war in Viet Nam and increased US dollar expenditures, made for tight credit conditions and widening spreads between interest rates in the Euro-dollar market and the US dollar. It thus became lucrative for banks to tap existing dollar reserves in the Asia-Pacific region, creating a natural inducement for foreign (especially US banks) to establish in Asia. Under the advice of the then senior Dutch policy advisor to the Singaporean government, A. Wiinsemius, plans were drawn up to tap this trend and host an Asian Dollar Market (ADM). While Hong Kong was viewed as an attractive destination for such a market, the imposition of a 15% withholding tax on interest income from foreign currency deposits and the unwillingness of Hong Kong authorities to remove this, created an opportunistic niche for Singapore. Subsequently, Singapore began a process of liberalisation, opening up its financial sector to allow the entry and establishment of foreign banks, the progressive liberalisation of the exchange rate control (fully liberalised in 1978), as well as the establishment of a series of favourable tax incentives designed to pullin foreign banks and financial service firms (Ng, 1998: 1). Central to these initiatives was the roll out of Singapore’s first financial legislation in 1967 and then a full-fledged Banking Act (1970) which set in place the primary architecture on which Singapore’s banking system would evolve. This was followed soon afterwards with the enactment of further legislation establishing the Monetary Authority of Singapore

150 International Financial Centres in Asia

(MAS), in essence Singapore’s central bank. Most significant among the first initiatives taken by the Singaporean authorities, however, was the authorisation of separate departments within banks to administer specified international transactions, assets and liabilities. These were denominated as an “Asian Currency Unit” (ACU), with ACU’s permitted to book certain transactions that enjoyed favourable tax and regulatory conditions. Under MAS guidelines, ACUs could deal in any currency denomination except Singapore dollars and could nominate ACU accounting on any transactions stipulated by the MAS, including: flotation, underwriting, buying/selling of shares, bond issues, securities, investment portfolio management, advisory services on M&A’s, structured finance, lending, discounting of negotiable securities, and issue promissory notes – among other activities (MAS, 2009).11 The authorisation of ACUs initiated Singapore’s offshore banking facility, creating separate accounting entities that discriminated between ACUs and Domestic Banking Units (DBUs) within banks. For Singapore, this had unique advantages, preserving the regulatory and prudential apparatus over domestic banking activities and thus the efficacy of national fiscal and monetary policy while creating facilities that would promote and capture an Asian Dollar Market (Bryant, 1985: 10–11; KheeGiap et al., 2001: 2; Ng, 1998: 4). More immediately, the adoption of a two-tier banking system allowed Singapore to protect its then nascent banking industry from larger and more sophisticated international competitors, all the time encouraging their location in the city-state and the development of its financial centre (Hew, 2002: 3). The first ACU was set up by the Bank of America in 1968 and proved so lucrative that by 1971 half of the existing banks in Singapore had set up ACUs. Indeed, the attraction of the ACU facilities led to an influx of foreign banks in the early 1970s, generating fears that Singapore’s domestic economy would soon be “over banked”. In response, the government and MAS created a new “restricted bank” licence, with operators allowed to engage in the full gambit of banking activities but prohibited from accepting domestic deposits of less than S$250,000 and restricted to one location with no sub-branching rights (Bryant, 1985: 14; Bryant, 1989: 345). The first six restricted bank licences were issued in 1971, with licensees opening ACU facilities that dominated their balance sheets. The popularity of restricted license banks saw their number double in the space of two years, prompting Singaporean authorities to introduce a third category banking licence to cope with the influx of foreign banks. The “offshore licence” enabled licensees to participate in the full gamut of activities approved for ACU activities

Darryl S.L. Jarvis 151

but with its DBU activities greatly constrained by MAS guidelines. By the mid-1980s Singapore had issued 72 offshore licences. As an offshore financial centre, Singapore quickly established an unsurpassed reputation in the region for its efficiency and business friendly environment, attracting European and North American banks in ever greater numbers. In line with foreign bank arrivals, ACUs expanded rapidly with a total of 160 licences issued by 1984. More importantly, asset volumes under ACU’s enjoyed rapid expansion, growing on average by 22% during the 1980s and accounting for 66.2% of all assets of Singapore’s banks by the early 1990s (Hew, 2002: 4). As an indicator of the success of Singapore’s financial centre, the relative ratio of ACU to DBU assets also expanded, growing from 28% in 1970 to a peak of 596% in 1987, with ACU assets reaching 11 times Singapore’s GDP. By the mid1990s, Singapore had established itself as one of the leading financial centres in Asia, attracting 185 foreign banks and operating the fourth largest foreign exchange market in the world behind London, New York and Tokyo, propelled largely off the back of a highly successful ADM. Policy initiatives in 1983 introducing tax incentives for the establishment of offshore funds management also witnessed Singapore emerge as one of the largest regional centres for wealth management, while allied initiatives to nurture increased financial depth witnessed Singapore emerge as the fifth largest derivatives market and the world’s fourth largest currency derivatives financial centre. By the 1990s, rapid economic growth throughout Southeast Asia uniquely situated Singapore, making it a financial platform for European and North American investment into Southeast Asia and, in the process, attracting 5,000 multinational enterprises operating regional treasury and financing operations in the city-state (Hew, 2002: 5; Tan and Lim, 2007). By the turn of the century, the financial services sector was generating fully 13% of Singapore’s nominal GDP (up from 6% in 1970), provided the largest value-add of any sector in the economy and was responsible for the largest source of tax revenue (Financial Services Working Group, 2002: ii). Institutional and regulatory contexts of Singapore development as a financial centre Bryant (1985, 1989) long ago made the observation of Singapore that it was unlike other countries in terms of its approach to financial sector management and development. The MAS, for example, while the central bank of Singapore and responsible for the conduct of monetary policy, issuance of currency, oversight of payment systems and acting as banker and financial agent for the government, functions more as an arm of

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government than a standalone statutory entity. As Bryant (1985: 11) observes, “monetary and financial policies in Singapore are jointly formulated and coordinated with government budgetary policies and overall strategy for the development of the Singapore economy”. As the peak regulator, MAS is “effectively controlled by the key political figures in the Singapore government” (Bryant, 1985: 11). The MAS board, for example, is drawn heavily from the ranks of cabinet ministers and currently chaired by Senior Minister Goh Chok Tong (former Prime Minister of Singapore), creating direct linkages between cabinet, government policy agendas and the management and operations of MAS.12 This is in marked contrast to regulatory models developed in other financial centres and reflects Singapore’s singular approach to policy development, implementation and coordination; a model that might more appropriately be characterised as “Singapore Inc.”. Mapping the regulatory and institutional apparatus responsible for financial sector oversight as distinctive organs independent of government is thus inappropriate in the Singapore context; regulatory politics is a whole of government concern and intimately associated with Singapore’s image and attractiveness as an investment destination. More obviously, the central importance of Singapore’s financial centre to the city-state’s economic future makes it of central concern to all stratums of government economic planning. The result is a highly technocratic approach to financial sector management and oversight but one that is not always transparent. As one senior banker with a European bank observed, “when I first came here I could not work it out … they seemed to make decisions behind closed doors and announce outcomes without consultation … now I understand that they do consult but through soundings … not directly. Its very indirect here unlike in Europe” (interview, June, 2008). Another senior executive with a different European financial institution opined that in Singapore its “not about transparency its about not speaking and making a statement that might not be government policy … so you tend to get a lot of deferment up the chain … they are really concerned not to send out conflicting signals …” (interview, May, 2008). This has created a singular unity between government policy and the objectives of the regulator, with one Swiss banking executive observing that its simple here “because there is no confusion between what the regulator wants and what politicians want … it’s a very efficient system” (interview, May, 2008). This same “singular unity” infuses into the institutional fabric of commercial practices and norms supporting Singapore’s financial

Table 4.4

Singapore financial centre: Banking sector and financial sector composition

Sector

Composition

Structure

Description

Regulator

Banking

– 114 Commercial banks – 33 Full banks – 41 Wholesale banks – 40 Offshore banks – 50 Merchant banks – 36 Representative offices of banks

Three-tier system of commercial banks: full banks, wholesale banks, and offshore banks.

Full banks provide the whole range of banking business approved under the Banking Act.

Monetary Authority of Singapore (MAS)

Offshore banks can engage in the same activities as full and wholesale banks for businesses transacted through their Asian Currency Units (ACUs).

v)

The MAS is responsible for the regulation/ Wholesale banks do not supervision of the carry out Singapore banking sector: dollar (SGD) retail i) Implementing banking activities. They monetary policy; operate within the ii) Supervisor of the Guidelines for banking systems; Operations of iii) Banker to the Wholesale banks issued government; by MAS. iv) Banker to the banks; Controller of international reserves; vi) Issuer of currency; vii) Issuer of banking licenses; viii) Lender of last resort

153

Merchant banks are approved under the MAS Act and their operations are governed by the Merchant Bank Directives.

Singapore financial centre: Banking sector and financial sector composition – continued

Sector

Composition

Structure

Foreign exchange market

Open (after SGD was floated in 1973, banks were free to quote exchange rates).

Absence of exchange controls (free market)

Description

SGD is one of the 11 currencies in the Continuous Linked It follows a floating Settlement (CLS). This foreign exchange eliminates foreign system and links Exchange rate system of exchange (Fx) settlement risk. SGD to US dollar. The average FX daily trading volumes reached US$229 billion in October 2007. Average daily FX turnover reached US$231 billion.

Debt market

Debt securities include It is comprised of bonds, debenture, loan corporate debt market stock, NCDs and others. and Singapore Government Securities (SGS, inc. treasury bills, SGS bonds).

770 companies with a combined market capitalization of S$671 billion.

154

Table 4.4

Regulator Singapore Foreign Exchange Market Committee (SFEMC), sponsored by MAS. By 1 June 1978, Singapore completely removed its exchange control regulations. SFEMC published Singapore Guide to Conduct and Market Practices for Treasury Activities as the standard and code of Fx market activities. Incentives have been given to financial institutions with approved Bond Intermediary (ABI) status. The Qualifying Debt Securities (QDS) scheme was granted to investors.

Table 4.4

Singapore financial centre: Banking sector and financial sector composition – continued

Sector

Composition

Structure

Description

Regulator

Money market

– Inter-bank market – Discount market

All four discount houses are joint ventures by major local banks and foreign finance groups.

The inter-bank market refers to transactions among the banks.

Monetary Authority of Singapore (MAS)

The major participants in the market are commercial banks, merchant banks, money brokers and MAS.

Equities market

– Primary market – Secondary market

Several methods to raise capital in the equity market: public issue, offer for sale, private placement, bonus issue and rights issue.

The basic function of Discount Houses is to accept short-term funds from commercial banks, and to a lesser extent from other financial institutions.

A primary market for issuing new equities, including shares.

The major instruments are: i) Treasury bills; ii) Government stocks and bonds; iii) Bills of exchange; iv) Negotiable certificates of deposit. Companies that have raised equity capital through public subscription have to seek a listing on the Singapore Exchange (SGX). 155

The secondary market, the stock exchange, is where these equities are traded after flotation.

Under the Banking Act, commercial banks are required to maintain accounts with MAS.

Singapore financial centre: Banking sector and financial sector composition – continued

156

Table 4.4 Sector

Composition

Structure

Description

Regulator

Gold and commodities markets

Gold market is comprised of two major segments: – Spot market (including Loco London market and Singapore kilobar market) – Futures market Singapore Commodity Exchange (SICOM): trading of commodity futures (e.g. Rubber)

Companies, individuals, residents as well as nonresidents are allowed to participate freely. Gold bars of the lightweight class are also traded in the physical gold market.

SICOM maintains a computerised network that links market brokers. All contracts are cleared through the Clearing House.

Committee on Rubber Trading (CRT) oversees the privatisation of Rubber Association Singapore (RAS).

Asset management

The collective investment schemes (CIS) include the unit trust, money market fund, property fund. Alternative investment: Real Estate Investment Trusts (REITs), private equity, venture capital and hedge funds.

Other financial institutions, such as banks and insurance companies, are involved in asset management.

Recognised as one of the premier asset management centres in the Asia Pacific.

MAS support the asset management industry by introducing incentives: i) enhancement to the tax exemption scheme for foreign investors; ii) Enhancement to the tax exemption of income of foreign trusts scheme; iii) Enhancement to the Designated Unit Trust (DUT) scheme. The listing of investment funds on the SGX-ST are required to follow the listing criteria.

Table 4.4

Singapore financial centre: Banking sector and financial sector composition – continued

Sector

Composition

Structure

Description

Regulator

Asian dollar market

Sources from central banks, government agencies, commercial banks and other financial institutions.

Comprised of financial institutions borrowing and lending dollars and other currencies outside the countries of origin.

The market is an international financial market where institutions accept the deposit of hard currencies outside their countries of issues.

Financial Sector Incentive (FSI). ACUs are automatically granted the Standard Tier award for five years.

The SGX Derivatives Trading Division (SGXDT) operates two trading systems: the open outcry and the Electronic Trading System.

SGX-DT has become a leading derivatives exchange in Asia.

Singapore Exchange Derivatives Clearing Pte Ltd (SGX-DC) performs daily clearing and settlement, and supervises delivery of contracts. It administers the Mutual Offset System (MOS).

Non-bank sources include MNCs, affluent individuals, and business firms involved in international trade. Derivatives market (Futures)

Derivatives products composed of five types of futures: i) Equity index futures; ii) Interest rate futures; iii) Middle East Crude Oil (MECO) futures; iv) DRAM futures; v) Single stock futures

SGX securities trading rules reflect current market practices. 157

158

Table 4.4

Singapore financial centre: Banking sector and financial sector composition – continued

Sector

Composition

Structure

Description

Regulator

Insurance

– 151 Registered Insurers – 61 Direct Insurers – 28 Reinsurers – 62 Captive

Insurers may conduct insurance activities in Singapore as registered insurers, authorised reinsurers or foreign insurers.

Registered insurers are approved under Section 8 of the Insurance Act (Cap 142) to conduct life and/or general insurance business.

The Committee on Efficient Distribution of Life Insurance (CEDLI) is appointed by MAS to improve life insurance products.

S$152.8 billion overall issuance volume.

Reinsurers without an operating presence in Singapore can conduct reinsurance business in Singapore as authorised reinsurers under Section 8A of the Act.

The direct general insurance brokers adopt the General Insurance Code of Practice and the Guidelines, jointly developed by the General Insurance Association of Singapore (GIA) and the Singapore Insurance Brokers Association (SIBA).

Insurers – six Authorised Reinsurers

Source: Monetary Authority of Singapore (MAS).

Darryl S.L. Jarvis 159

centre. While an extensive series of professional networks has emerged in Singapore, the sense in which they work independently of government or at variance to government is a moot point. The boundaries that divide government from civil society are blurred given the histoical importance of the state to Singapore’s economic development. Professional bodies and networks in the financial services sector thus tend to look to government for indicative referents by which to inform their practices and commercial norms. This creates a kind of formalism or culture of legalism that frames commercial practices in the financial services sector. Interviews with foreign bank executives in Singapore, for example, commonly highlighted a propensity to administrative formalism compared to a more intensely networked atmosphere in Hong Kong that draws upon trust relationships among professional networks. As one executive with a European Bank observed, “when I worked in Hong Kong the atmosphere was more intense … here (Singapore) its more cliquish and not easy to connect with information … here (Singapore) the government drives things but … in Hong Kong the place is driven by the commercial guys …” (interview, May, 2008).

III Contest and competition among Asia’s financial centres The changing nature of Asia’s economic landscape is perhaps most dramatically felt in the flows of fast moving money sweeping between Asian capitals. From the mid-1960s through the early 1990s, Japan dominated Asia’s financial landscape, controlling upwards of 23% of global financial assets – the second largest in the world behind the United States. In more recent years, however, Japan’s importance has diminished. While remaining the third largest financial market in the world after the United States and the Eurozone economies, its relative importance in Asia is in virtual free fall. By 2007, for example, Japan’s share of global financial assets had declined to just 12% while its financial market assets of US$19.5 trillion are now almost equalled in the rest of Asia at US$18.8 trillion dollars (Farrell et al., 2008: 13, 21).13 Similarly, between 1990 and 2006 the intensity and depth of Japan’s financial connections to the region and the rest of the world stagnated while the rest of Asia enjoyed deepening financial linkages. Singapore, Hong Kong and Taiwan, for example, “now have larger cross-border investments with China and other emerging economies than does Japan”, and where Tokyo managed to attract just four overseas listings on its stock exchange between 2004 and 2007, Singapore by contrast attracted

160 International Financial Centres in Asia

40 (Farrell et al., 2008: 62; Tucker, 2007). As Farrell observes, while Asia has enjoyed increasing financial linkages, Japan has essentially been “shut out of Asia’s financial integration – in part reflecting the fact that Tokyo’s financial might is almost entirely domestically focused; its debt markets driven by government securities and its equity markets semi-protected by onerous regulatory measures” (Farrell et al., 2008; see also Kawai, 2008). The erosion of Japan’s regional financial hegemony signals an intensifying race to become Asia’s next great financial centre. More obviously, it also underscores a series of competitive parameters that both validate much of the existing theoretical literature while also highlighting its limitations. Place and space, for example, continue to cast a long shadow as mechanisms that engender financial clustering and determine its spatial distribution. Shanghai’s re-emergence as Northern China’s pre-eminent trade hub, for instance, has been one of the primary catalysts driving growth in the city’s financial services sector. Not only does Shanghai benefit from its strategic geography on the Yangtze River Delta, but since the early 1990s has been the chief beneficiary of State Council initiatives to integrate the region economically and promote the greater Yangtze Delta as the primary growth driver of the Chinese economy. The Yangtze regional economic integration plan commenced in 2004, for example, is designed to create a 16-city metropolis centred around Shanghai, integrating the eight cities toward the northwest of Shanghai in Jiangsu Province (Nanjing, Suzhou, Wuxim Chanhzhou, Zhenjiang, Yangzhou, Taizhou, and Nantonmg) and the seven cities to the south in Zhejiang Province (Hangzhou, Ningbo, Jiaxing, Huzhou, Shaoxing, Taizhou and Zhoushan), through the eradication of trade barriers and the development of an integrated transportation network (Xinzhen, 2009b: 34). By 2012, a high-speed expressway, intercity bus and train network will provide a “three-hour metropolitan circle with Shanghai as the core city”; effectively turning Shanghai into the transportation epicentre of a region servicing over 80 million people, generating 19% of the country’s GDP, 25% of the nation’s fiscal revenue and 37% of the nation’s total exports (Xinzhen, 2009a: 32). Clearly, Shanghai’s re-emergence as a regional trade and transportation hub is a major impetus to financial clustering, with growth in the financial services sector strongly aligned with growth in trade volumes, manufacturing and related commercial activities in the Yangtze River Delta region. While other countries have tried to launch their own financial centres (Labuan in Malaysia, Bangkok International Finance Faculty, Thailand,) the evidence of success in the absence of being located on or at the intersection of a major trade route, provides a telling lesson.14 All

Darryl S.L. Jarvis 161

three financial centres analysed here, for example, occupy a geographically strategic niche at the cross-roads of major trade routes, each services a large economic hinterland and each acts as a be-spoke transportation hub to the region and beyond. The clustering of financial services around such hubs, from maritime and logistical services, insurance, brokerage firms, clearing and settlement houses, banks, foreign currency exchange, accounting and other merchant support services, is thus intimately related to growth in trade, exports, and manufacturing activity. It is thus no coincidence that as global trade has increased, and East-West and intraAsian trade deepened over the last 30 years or so, the region’s major trade hubs, Hong Kong, Singapore and Shanghai, have likewise also emerged as leading financial centres. Yet it would be inappropriate to dismiss the emergence of these centres as purely an accident of economic geography. Place and space might be necessary conditions but by themselves they are not sufficient for the emergence or retention of financial clustering. Despite the continuing legacy of Japan’s trade hub status and its financial size, its declining status as an international financial centre relates as much to the nature of its policy environment and the institutional architecture facilitating external linkages and commercial practices as it does the rise of competitor centres and a transforming regional economic geography. It is interesting to observe, for example, the high correlation identified in the “World City Relational Data” and the distribution of Asia’s international financial centres (World City Relational Data, 1997–2001). In virtually each of the indices (Global Network Services Connectivity; The Relative Centrality of Cities Based upon Air Passenger Travel [1977–1997]; World Cities and Global Firms; International Tourism Arrivals, [2007]; among others), the distribution, size and changing relative hierarchies between Tokyo, Singapore, Hong Kong and Shanghai display a common unity – indicative of the changing depth of regional and global linkages of all types that these cities display. In other words, as the degree of external linkages has increased and various restrictive measures limiting engagement have been eased, the hierarchal distribution of Singapore, Hong Kong and Shanghai as international financial centres has been positively impacted. The lesson is obvious: financial sector, trade and commercial liberalisation and deliberative policy that deepens regional– global economic linkages is highly positively correlated to financial sector development and financial clustering. Geography thus remains important, but absent a policy framework that encourages cross-border financial transactions, the opportunities for intermediation of regional and global capital flows are ultimately diminished.

162 International Financial Centres in Asia

Blunter data suggesting a similar conclusion can also be inferred from global indices measuring, for example, globalisation. The “A.T. Kearney/ Foreign Policy Globalization Index” (2006) analyses 16 separate measures indicative of external linkages and the degree of openness to foreign direct investment (FDI), trade, technological engagement and economic integration. Again, perhaps not surprisingly, Singapore ranks first, Japan 28 and China 51. While Hong Kong SAR is not ranked independently, similar indices measuring openness such as the “Index of Economic Freedom”, ranks Hong Kong first and Singapore second, while Japan is ranked 19th and China 132nd (Heritage Foundation, 2009). Likewise, indices produced by the World Bank (World Bank, Doing Business, 2009) analysing the ease of doing business such as startup business and compliance requirements, credit availability, trade barriers and employment restrictions, similarly rank Hong Kong and Singapore in the top ten best performing countries while Japan and China perform less well.15 The point, of course, is not to highlight the merits of such indices or the rankings produced, but to suggest that the metrics used focus on important enabling policies, capacities, institutional and regulatory arrangements that are central to financial clustering and increasing financial density. More generally, it speaks to a convergence in those attributes and characteristics identified in the world cities and endowed capacities literatures; specifically, the panoply of environmental factors from infrastructure (telecommunications, air links and transportation, etc.), the regulatory environment, availability and sophistication of human resources, depth of information symmetries, intensity of professional, social and financial networks, and the role of market and commercial norms in reducing transaction costs, as critical attributes for the success of financial centres. Further, it highlights an obvious correlation; those places that display the greatest depth and sophistication of soft-institutional attributes and capacities also tend to be the most open, interconnected and globally-regionally networked cities. In Asia, where greater flux, fast changing economic geographies and where financial and commercial linkages are not as historically ingrained, this probably suggests a greater sensitivity in the region’s financial centres to competitive changes in these endowed capacities. Indeed, this conclusion seems to be born out in interviews with various executives in financial services firms in Hong Kong, Singapore and Shanghai. Interview questions that asked participants about what they perceived the advantages of locating financial services firms in their current domiciles were frequently answered by reference to endowed capacities, including air transport links (Hong Kong, Singapore), language and communication

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issues (Singapore and Hong Kong), quality of infrastructure (Singapore and Hong Kong), rule of law and political stability (Hong Kong and Singapore), as well as instrumental factors like financial capacity and depth of financial markets (Hong Kong and Singapore). As one UBS commodities trader noted on moving UBS regional headquarters to Singapore from Hong Kong, “transparent laws, geographical location, efficiency in shipping and its global view give Singapore an edge over countries such as Japan, which can be rather introspective” (as quoted in Huiwen, 2008). By contrast, interview respondents in Shanghai frequently made reference to the absence of many of these endowed capacities, noting, instead, the growth potential of Shanghai as a regional financial hub, emerging capacities, improving infrastructure and increasing financial depth. Such responses confirm previous studies (see Tschoegl, 2000: 12–14) and the implicit role such factors play in the location decisions of financial services firms, finance professionals and thus the prospects for financial clustering (see also Beaverstock, 2002). These are important observations since they suggest that the contours of the current competition to become Asia’s next great financial centre will rest predominantly in changes to the endowed capacities each of these centres display – and the degree to which they are able to sustain dynamic and innovative renewal of these capacities. They also suggest the magnitude of the difficulties involved in fostering the development of such capacities and the dexterity required through policy coordination to sustain them. Despite its methodical state-based policy and planning apparatus, for example, Japan’s policy elite have stumbled, seriously compromising the future of Tokyo’s financial status. In South Korea, where the role of the state in directing development has historically enjoyed high rates of success, attempts to nurture openness and develop Seoul into a regional financial hub have stalled. And in Thailand, the experiment of the Bangkok International Financial Facility (BIBF) in the 1990s demonstrates the dangers of poorly sequenced and poorly managed policy in an impaired policy environment.16 For Hong Kong, Singapore and Shanghai, this points to a first mover advantage and increasing barriers of entry for prospective new participants to the contest. Yet, it in no way guarantees the continuing success of these centres or marks an end to the contest. As Sagaram and Wickramanayake (2005) note: The importance of financial centers in the Asia-Pacific is likely to continue … However, it is not easy to predict which specific factors will emerge as crucial for each center, nor indeed which specific center

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will emerge in a leading position. This will depend not only of the static comparative advantage of the different cities but also the dynamic competitive advantages created by their policies and strategies. Incumbents (such as Australia, Hong Kong, Japan and Singapore) will always have their own comparative advantage, but no lead is totally unassailable, as London found to its dismay in 1998 when – in the space of just a few months – Frankfurt snatched away the trade of German Bund futures (Sagaram and Wickramanayake, 2005: 21). Likely trajectories: Shanghai, Hong Kong and Singapore These observations provide a means of assessing the likely outcomes of the competition between Shanghai, Hong Kong and Singapore to become Asia’s next great financial centre. If policy dexterity, innovativeness, adeptness and the ability to respond quickly and with whole of government approaches are leading measures for financial centre growth, then Shanghai will likely prove the laggard. Ironically, this will be through no fault of Shanghai or the municipal leadership but through the inability of Shanghai to control its own destiny. Beijing remains a major obstacle to Shanghai’s desire to liberalise its financial services sector and implement policies aimed at speeding up the process of financial clustering and increasing financial density. Much of this derives from a cumbersome, opaque and inherently slow policymaking process in Beijing, where a historically cautious and conservative culture among the senior party leadership and State Council make it difficult to get clear policy signals and directives on which to base policy development or set policy agendas. In the absence of definitive policy directives, Shanghai’s municipal government can only wait, watch and anticipate when next Beijing will announce new initiatives, all the time scrambling to measure the consequences of these for its financial services sector. Perhaps of more concern for Shanghai, however, is the fact that Beijing may not have made up its mind about what to do with Shanghai. To be sure, many of the signals that emanate from Beijing send assurances that Shanghai is the chosen city to become China’s window to the world. As Liu Tienan, Vice Minister of the powerful National Development and Reform Commission (NDRC – China’s pre-eminent policy planning apparatus with direct input into State Council) noted recently, “Shanghai is the most qualified metropolitan city on the Chinese mainland to pursue the ambition of building international shipping and financial centers” (as quoted in Xinzhen, 2009a: 32). But the debate

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is not settled. Beijing itself has ambitions to develop its already extensive financial sector, leveraging off the presence of leading national and international banks as well as a sizeable number of multinational enterprises. Guo Jinlong, Beijing’s all powerful mayor, for example, has at various times promoted Beijing as China’s natural financial capital, going so far in November 2008, to participate and host a general assembly on energy and finance convened in Beijing, that spoke of developing Beijing into an international financial centre.17 Importantly, as Mayor of Beijing, Guo Jinlong occupies a strategic position which, along with Beijing’s Municipal Committee Secretary, exerts considerable influence in China’s all powerful elite ruling body, the Politburo. It might thus be premature to assume that support for Shanghai to develop its financial centre will always be contiguous and forthcoming, or that Beijing will adjure to a “single city” national plan centred on Shanghai as China’s primary financial capital – Beijing could change its mind or simply vacillate, leaving Shanghai in the unenviable position of being a financial vicariate of Beijing. Indeed, there are reasons to suppose this conclusion might gain poignancy. Immediately to the South-east of Beijing, for example, Tianjin has also been promoted by Beijing as a future financial centre. Like Shanghai, Tianjin is the only other municipality to have been afforded preferential treatment and favourable funding policies, indicative of Beijing’s support to see the municipality develop its financial services sector. The Binhai District of Tianjin, for example, was the first to be granted dispensation by the State Administration of Foreign Exchange to engage in direct investment in overseas securities. Similarly, the China Insurance Regulatory Commission has allowed the district to engage in self-directed insurance reform and liberalisation while State Council approved Tianjin’s Port as China’s largest free port (China Stakes, 2008). All this points to a vexed and contradictory series of policy signals that could seriously hinder Shanghai’s latitude to develop those capacities necessary for its financial sector. While Hong Kong and Singapore enjoy autonomous governance and can engineer whole of government responses to position their financial centres competitively, Shanghai struggles for autonomy and remains far from the seat of government and decision making. Where Hong Kong and Singapore can rely on the HKMA and the MAS who act as both regulatory and protector of their respective financial centres, Shanghai is forced to rely on the planning, oversight and regulatory capacity of the PBOC and the CBRC, who operate outside of Shanghai’s political orbit and maintain only regional offices in the city and who are charged with national regulatory

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and financial sector oversight, compliance and enforcement and not, as such, the promotion of Shanghai’s financial services sector. As Wang et al. (2007: 116) notes, while observers bemoan the problems that Beijing creates through intervention in China’s financial system, “ironically, it is exactly the intervention itself that solidifies Beijing’s financial competence” and provides the city with a highly competitive edge over Shanghai. Beijing’s agential power over all facets of China’s financial system thus makes the city structurally important, pulling in national and international financial services firms whose location in Beijing reflects their attempts to manage and reduce asymmetrical information barriers by locating at the epicentre of decision making – with Beijing hosting the largest share of representative offices of foreign financial institutions in China (44%) while Shanghai accounts for only 25% (Wang et al., 2005: 114). Ironically, then, it is foreigners who probably have greater confidence in the assumption that Shanghai will be China’s next international financial centre than do the Chinese or residents of Shanghai themselves. As always, however, the signals out of Beijing continue to make for a complex environment. The announcement by Beijing on May 12, 2009, for example, that it would allow foreign companies to list on the Shanghai stock exchange reaffirms Beijing’s support for Shanghai and raises the specter of Shanghai commencing international listings and IPOs (initial public offerings) in direct competition with Hong Kong.18 For Hong Kong, this points to a longer-term danger that threatens its viability as one of Asia’s premier international financial centres. Hong Kong currently acts as the Mainland’s preferred bourse for listing large numbers of Mainland enterprises (H shares). Indeed, Hong Kong has become increasingly reliant on its H share listings, in part reflecting its declining role in cross-border banking intermediation between Asia and the rest of the world and its increasing role as an intermediator of FDI and portfolio investment into Mainland China. The HKEx, for example, now hosts some 141 H listings compared to only eight international (non-Mainland) listings (Cheung and Yeung, 2007: 28; Leung and Unteroberdoerster, 2008: 9). Hong Kong’s current competitive advantage, however, is inversely related to the immaturity, lack of depth of debt markets, perceived political instability and the political risk associated with Beijing’s interventionism into the financial markets in the Mainland. If, as has been announced, Beijing moves to aggressively promote international listings on the Mainland in the Shanghai Stock Exchange, the arbitrage Hong Kong has traditionally enjoyed will begin to erode. The longer-

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term fear for Hong Kong thus resides in it losing its current status as China’s financial window to the world, as investors engage directly with Mainland financial centres. Indeed, it is these fears that likely prompted Hong Kong’s recently announced transparency initiatives that aim to increase the frequency of reporting and disclosure practices of listed companies on the HKSx. These aim to more closely align the regulatory practices of Hong Kong with major bourses in the United States and Europe, creating regulatory synergies designed to facilitate increased overseas listings on the HKSE and, at the same time, lessen its reliance on H share listings (Global Financial Centers Index: 5, 2009: 17). The extent to which Hong Kong’s fears will be realised in the short term, however, are problematic. Hong Kong’s financial depth, intensive social and professional networks and the sheer depth of its softinstitutional structures, creates comparative advantages that will likely linger for another generation. Despite rapidly developing institutions and regulatory systems and vast improvements in the capacity of agencies like the PBOC and CRBC in recent years, Shanghai lags well behind its southern counterpart. This may have been one of the reasons behind Beijing indicating its preference for Hong Kong to develop its offshore Yuan business – the only place outside of the Mainland permitted to do so (Huang, 2009). Whatever its intentions toward Shanghai, Beijing is equally aware of its limited albeit growing capacities. Hong Kong will thus continue to benefit from this for the foreseeable future; indeed will likely prosper because of its financial capacity to aid China’s immersion into global financial networks. As in the past, Hong Kong’s continued fortunes will thus lie inextricably with the Mainland’s, but only insofar as Hong Kong manages to steer a fine line between servicing Mainland financial needs while preserving its ability to define its own policy environment and pursue discretionary policies that competitively advantage its financial services sector. Singapore, by contrast, faces a series of more diffuse issues. Historically, its role as a “safety box” centre for capital in Southeast Asia has provided the city-state with its comparative advantage and its engine of growth. For Singapore the trick lies in maintaining this but in an environment where “safe box” banking will come under increasing scrutiny. At the G20 Summit in London in 2009, for example, the OECD placed Singapore on its “grey list” of states that “are committed to the international OECD standard on sharing information on taxes but not yet substantially implementing it” (OECD, 2009; see also Vlcek, 2009). The move prompted Singapore (May, 2009) to announce its intention to amend laws relating to its financial centre in order to meet OECD

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transparency and disclosure standards. Yet, in doing so, the regulatory arbitrage Singapore has enjoyed in its push to become the “little Switzerland of Asia” and a centre of wealth management, will likely erode. Singapore will thus have to look elsewhere to sustain growth drivers in its financial services sector and in a sub-region where growth is robust but otherwise dwarfed by the intensity of financial activity occurring in Northeast Asia. All this points to a series of larger systemic problems facing Singapore and how to intermediate capital that increasingly will be drawn not to Southeast Asia but China. While the “safety box” appeal of Singapore will of course remain in a region that still faces political uncertainties (especially for its Chinese Diaspora in Indonesia, Malaysia and Thailand), sustained growth in its financial services sector will need to come from alternative specialisations. Rather, the city-state’s role in debt raising, insurance, attracting overseas listings to its stock exchange, and banking intermediation between Asia and the rest of the world, will need to be deepened but in ways that go beyond relaying on organic growth in the global economy. The problem for Singapore lies in how to do this, especially in an environment which, as Maurice Tse notes, lacks a “traditional free market culture” unlike Hong Kong that reduces “the scope for financial and economic innovation in Singapore” (Tse, 2006: 1). While Singapore’s debt markets have grown impressively, for example, less impressive has been its ability to develop and innovate financial products and to originate financial instruments (Farrell et al., 2008: 66). Yet, it is precisely in this domain where growth in Singapore’s financial centre will need to come if its longer-term viability and relevance to a fast changing region is to remain. For Singapore, as for Hong Kong, adroit policy that nurtures such an environment will prove all critical in the race to dominate Asia’s financial landscape. Implications of the rise of China for Asia’s international financial centres By analysing the institutional contexts and policy architecture which support each of the financial centres surveyed in this chapter, the evidence is fairly stark that China’s much heralded rise is both premature and exaggerated in terms of it displacing or radically altering Asia’s current financial geography. Rather, Shanghai’s entry into the ranks of Asia’s existing financial centres complicates the region’s circuits of capital without necessarily displacing or radically transforming patterns of financial agglomeration. Much of the hyperbole that surrounds China’s growth thus needs to be tempered: economic activity is dis-

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tinct from financial clustering and while the former may be necessary for the emergence of the later, the intensity of China’s economic activity is not sufficient to guarantee its dominance as a regional financial hub. The reasons for this conclusion derive from three principal considerations. First, unlike Hong Kong or Singapore (or Tokyo for that matter), Shanghai’s financial markets operate under the weight of political directives and the ever present prospect of political intervention. Prior to the global recession, for example, China’s banking sector had been widely characterised as a rapidly commercialising sector, with authorities introducing market disciplines, modernised risk management practices and generally strengthening the quality of bank lending and debt management practices. As one consulting house noted as recently as 2007: Chinese state-owned banks have been reforming their traditional approach of accepting deposits and lending, turning their attentions to making commercial business decisions. Three of the largest stateowned banks have received injections of capital and sold many nonperforming loans to state-owned asset management companies. Following cash injections, these banks took on foreign partners to help speed internal reforms and add commercial risk management and financial product skills (Deloitte, 2007: 4). Even the IMF noted the speed and apparent unidirectional reform processes of China’s state-owned commercial banks (SCBs), lauding governance reforms, the introduction of “corporate governance standards” and noting that two of the largest SCBs (Bank of China and China Construction Bank) had made significant progress by instituting risk management reforms (Podpiera, 2006: 4–5). In particular, the report observed that the BOC and CCB “have put into place a new corporate governance structure with a share holders’ meeting, board of directors, board of supervisors, and top management operating according to newly adopted rules”, while BOC had appointed several senior international experts serving as “independent directors” (Podpiera, 2006: 6). Across the sector it was generally assumed that China’s banks were well on their way to operating as fully commercialised entities freed from political interference or state directed credit edicts. Such assumptions, of course, have proven a chimera. The recently announced stimulus package to offset the impact of the global recession, for example, has seen the government implement spending measures

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equivalent to 15% of GDP, but directly funding only a portion of this with the remaining liquidity provided by the four SCBs and directed credit edicts from the politburo. In all, directed credit and lending practices by the SCBs will amount to some nine trillion RMB in 2009; a sum that exceeds all loans issued in the preceding two years (Maidment, 2009). This vast sum of money aside, the most revealing development is surely the speed with which China’s banks have fallen in line, proceeding to jettison commercial practices, risk management standards and otherwise shovel money out of the door regardless of the quality or size of the liabilities they are incurring. The partial flotation of the SCBs and other measures designed to instill commercial precepts and guarantee commercial autonomy, have all but fallen away with authorities viewing SCBs as little more than state instrumentalities. Such actions cast a long shadow over the prospects for Shanghai or any other mainland banking centre assuming the mantel of a Hong Kong or Singapore in the near or medium term. Political risks still cloud Shanghai’s future with the state prone to the recurrent use of directed credit as a means of macro-economic management. For the financial services sector this not only impacts the extensity of market operation but it distorts market signals, adversely impacting bank liquidity and debt quality and introduces exogenous factors that denude market autonomy. Concerns about the efficacy of China’s financial markets and their susceptibility to political manipulation will thus limit Shanghai’s ability to become a choice destination for capital, a regional centre for wealth management, insurance or a preferred banking hub. Second, the restrictive and highly managed nature of the Renminbi will limit its ability to operate as an international store of value or as a primary instrument for the settlement of international transactions. Unlike its major trading partners, China continues to manage its currency and set trading bands which remain non-transparent, using the relative currency weightings of the Renminbi as a mechanism to bolster external demand for Chinese exports. However, so long as China continues to manage its currency along lines broadly dictated by political considerations rather than market forces, few international investors will view the Renminbi as a preferred store of value and fewer still with see it as capable of supporting the emergence of large international capital markets. Shanghai will thus have an uphill battle trying to leverage itself off the back of the Renminbi where concerns about its stability and convertibility will continue to haunt it and

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otherwise frustrate the efforts of mainland financial centres to gain a dominant foothold in the region. Third, thin market transparency and the continued dominance of state-owned enterprises in China’s economy will limit the development of market depth and constrain the capacity of equity markets to mature. Information asymmetries and non-transparent corporate reporting standards continue to plague many of China’s SOEs, and the historical paucity of disclosure standards combined with still emerging regulatory frameworks governing corporate practices, will limit the rapid development of market transparency and thus limit market efficiency in the near to medium term. Amid such limitations, Shanghai’s capacity to attract international listings or act as a regional bourse for capital raising will be constrained. These three factors cut across the major sectors of a financial centre (banking, equity market, currency trading), restricting the arbitrage that Shanghai might otherwise expect to be able to generate from financial services. Collectively, they highlight the considerable obstacles Shanghai faces in establishing its presence among the region’s financial centres. More obviously, they highlight the capacity that still remains to be developed before the institutional environment is fully developed or the instruments of financial regulation mature and able to support the workings of a highly complex set of financial markets. Much of China’s regulatory architecture is still evolving and its regulatory capacity thin or porous. To be sure, Asia has much to grapple with as China’s economic development accelerates and its industrial revolution deepens, but the suggestion that mainland financial centres like Shanghai stand ready to assume a regionally dominant role or become a global financial centre, vastly exaggerates current capabilities.

Notes 1 The author acknowledges the financial support of the Lee Kuan Yew School of Public Policy, National University of Singapore, Staff Research Support Scheme (SRSS) in conducting fieldwork and research for this chapter. The views expressed are those of the author. I would like to thank Rakhi Shankar, Lin Hui and Kelly Sovacool for research assistance in the preparation of this paper. 2 As a general disclaimer, it is worth quoting a recent IMF working paper by Cynthia Leung and Olad Unteroberdoerster (2008) regarding the measures for ranking international financial centres. Leung and Unteroberdoerster observe “There does not appear to be a universally accepted definition of the term ‘international financial centre’. Nor is there a unique framework

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3

4

5

6

7

8

9

of quantitative measures that would document their activities and relative performance” (Leung and Unteroberdoerster, 2008: 3). Evidence of how lucrative East-West trade was for Hong Kong is revealed by the fact that in the five years from 1879 the number of large Chinese trading business grew from slightly less than 200 to a little over 400 while the number of small trading firms grew from less than 300 to 2,400. See Hazel J. Johnson (2000), Banking Alliances. Singapore: World Scientific, pp. 140–141. As Catherine Schenk notes, the free exchange market offered by Hong Kong in an otherwise controlled international exchange rate regime allowed Hong Kong to generate tremendous wealth through foreign exchange arbitrage. “Residents of Europe and North America used Hong Kong to buy Sterling cheaply at discounted rates to that of the officially pegged rates and thus settle their debts to UK residents.” Likewise, foreigners managed to “convert their currency into HK$” and then to convert “HK$ to Sterling or US$ on the free market”. The People’s Republic of China (PRC) too used the free exchange market in Hong Kong as a means of satisfying its exchange needs for Sterling and its limited trading exchange relations (Schenk, 2002: 333; Ghose, 1987: 22–31). Interviews were conducted in-field in Hong Kong between June 18–26, 2008 and by phone with regulatory officials and private sector financial services firms in Shanghai at various times between June and August, 2007. Interviews with financial service firms in Singapore were conducted over the course of 2007 and between April 15 and July 25, 2008. A total of 14 interviews were conducted. Where the identities of interviewees are not revealed, this is at the request of the interviewees. Interviewees generally requested their identities to be concealed along with the identify of their organisation. Most nominated concerns about “offending” regulators, “breaching confidences”, or upsetting “trusted relationships” with regulators and or contacts in regulatory agencies as the reason for concealing their identity. Many were also concerned that should interviews not be “off the record” they would be unable to talk without gaining permission from their legal affairs department. Their requests have been respected. By contrast as Karen Lai observes, “In its pre-1949 glory days, Shanghai boasted the most sophisticated urban amenities and cosmopolitan reputation outside of Tokyo” (Lai, 2006: 3). The three other zones of the Pudong New Area consist of the Jinqiao Export Processing zone; Waigaoqiao Free trade zone and the Zhangjiang high-tech park. Prior to 1991 accounts were certified via peer evaluation based upon work experience and other localised practices that varied greatly from region to region (Narayan and Reid, 2000: 41–49). Until May, 2009, all foreign financial data firms were required to work through a Chinese agent and disclose commercial information to Chinese authorities, in practice the Xinhua News Agency who acted as the regulator of news and information services in China. Under pressure from the WTO and complaints lodged by the United States, the European Union and Canada, Beijing agreed in February, 2009, to establish an independent regulator (the State Council Information Office – SCIO). Under the new guidelines, foreign

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10

11

12

13

14

commercial providers of financial information will be required to apply to the SCIO for permission to operate. The SCIO have discretionary authority in the issuance of licences and their cancellation. No guidelines have been issued concerning the requirements for licensees, cancellation, or rights of appeal. See “Controls Relaxed on Foreign Financial Data Firms”, South China Morning Post, Friday, May 1, 2009. Singapore achieved independence from Britain in 1963 and merged with Malaya, Sabah and Sarawak to form Malaysia. Within two years, however, Singapore seceded from the federation and became an independent republic on 9 August 1965. DBU’s deal predominantly in loans and deposits denominated in Singapore dollars. They are subject to more stringent guidelines, including strict liquidity and reserve requirements and higher rates of tax compared to ACUs. While ACUs are regulated by the MAS and subject to MAS oversight, they are exempted from several provisions of the Banking Act (1970), including reserve and liquidity requirements. ACUs also enjoy a concessional tax rate on transactions (Hew, 2002: 4). The current composition of MAS’s management board, for example, is comprised of Mr. Goh Chok Tong (Chairman), Senior Minister; Mr. Lim Hng Kiang (Deputy Chairman), Minister for Trade & Industry; Mr. Heng Swee Keat, Managing Director, MAS; Professor Walter Woon Attorney-General, AttorneyGeneral’s Chambers; Mr. Koh Yong Guan, Chairman, Central Provident Fund Board; Mr. Tharman Shanmugaratnam, Minister for Finance; Mr. Teo Ming Kian, Permanent Secretary, Ministry of Finance; Mr. Lucien Wong Yuen Kuai, Managing Partner, Allen & Gledhill; Mr. Lim Chee Onn Executive Chairman, Keppel Corporation Limited (MAS, 2009). The most recent “Global Financial Centers Index” (2009) had Tokyo’s position as an international financial centre falling by eight positions to rank 15th in the world. The indices measures attributes such as the business environment, human resource availability and capacity, regulatory and compliance requirements, market access, infrastructure provision and competitiveness (Global Financial Centers Index, 2009). Labuan (Labuan International Business and Financial Center) was established in 1996 and originally championed by the Malaysian authorities as an international financial centre. In recent years, however, it has emerged as a “booking centre” (see Tschoegl, 2000: 5) for a wide range of financial products including investment banking services, funds management, investment holding, insurance, fund management, trustee holdings, Islamic finance and company management. Despite the intentions of the Malaysian authorities, Labuan has not been able to emerge beyond its “booking centre” status and grow into a fully functional international financial centre (see Jarvis, 2004). Indeed, this may reflect Labuan’s increasing reliance on booking business as the mainstay of its revenues – an outcome that has not escaped examination by international agencies because of the transparency and probity of the business booked through Labuan. Recent assessments by the IMF, for example, have highlighted needs for Labuan and the Labuan Offshore Financial Services Authority (LOSA) to increase transparency, corporate governance standards, as well as revise standards associated with its supervisory practices (IMF, Labuan, Malaysia, 2004: 18–21).

174 International Financial Centres in Asia 15 Other indices of openness produced by the World Economic Forum also place Singapore and Hong Kong in the top performing ranks for competitiveness, with Japan and China placing lower. See the World Economic Forum, “The Global Competitiveness Report 2008–2009” . Rankings produced specifically on the competitiveness, stability and openness of international financial centres, such as the Global Financial Centers Index (2009), rank Singapore third and Hong Kong fourth behind London (first) and New York (second) <www.cityoflondon.gov.uk/economicresearch>. See also the discussion in Richard Common (2001) “Globalization and the Governance of Hong Kong”, Globalization and Urban Government: New Perspectives on the Local Politics of Global City Formulation, paper presented for the 51st Political Studies Association Conference, Manchester, United Kingdom, April 10–12. 16 States as diverse as Thailand, Malaysia, Korea (ROK), Australia, Taiwan and Indonesia, for example, have all set their sights on becoming a leading financial centre in the Asia-Pacific. See, for example, “Taiwan Sets Sights to Become Financial Center”, The China Post, May 20, 2008 ; “Indonesia to Become Major Shariah Financial Center: President”, Europe News, March 2, 2009 . 17 See . 18 BBC World News, May 12, 2009. The timing and precise details about the instigation of overseas listings on the Shanghai Stock Exchange have not been clarified at the time of writing.

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176 International Financial Centres in Asia Hazel, J.J. (2000) Banking Alliances. Singapore: World Scientific. Heritage Foundation (2009) The Heritage Foundation & Wall Street Journal . Hew, D. (2002) “Singapore as a Regional Finance Centre”, AR10 Research Conference, March 7–8 <www.tcf.or.jp/data/20020307-08_Denis_Hew.pdf>. Hong Kong Monetary Authority (HKMA) (2008) Monthly Statistical Bulletin, December, 2008. Huang, G. (2009) “Beijing Bid for HK to Expand Yuan Business”, South China Morning Post, Monday, May 4. Huiwen, Y. (2008), “Singapore is Key Commodities Hub: UBS”, The Straits Times, Tuesday, May 6. International Monetary Fund (IMF) (2004) “Labuan, Malaysia: Assessment of the Supervision and Regulation of the Financial Sector – Review of Financial Sector Regulation and Supervision”, IMF Country Report No. 04/391, Washington, D.C. Jao, Y.C. (1974) Banking and Currency in Hong Kong: A Study of Postwar Financial Development. London: Macmillan. Jarvis, D.S.L. (2004) International Financial Centres: Prospects for Southeast Asian Economies. Ministry of Finance, Japan and the Research Institute for Asia and the Pacific, University of Sydney, Australia. Karreman, B. and van der Knapp, B. (2007) “The Financial Centres of Shanghai and Hong Kong: Competition or Complementarity?”, Erasmus Research Institute of Management Report, The Netherlands, ERIM Report Number ERS-2007-062ORG <www.erim.eur.nl>. Kaufman, G.G. (2000) “Emerging Economics and International Financial Centers”, Mimeo . Kawai, M. (2008) “Evolving Regional Financial Architecture in East Asia”, Research Policy Brief 25, Asian Development Bank Institute, Tokyo. K.-G., Tan, Karigane, T. and Yoshitomi, M. (2001) Avoiding Double Mismatches and Withstanding Regional Financial Crisis: The Singapore Experience. Tokyo, Japan: Asian Development Bank Institute, Research Paper, Number 30. Kindleberger, C.P. (1974) The Formation of Financial Centers: A Study in Comparative Economic History. Princeton Studies in International Finance, No. 36. Princeton, New Jersey: Princeton University Press. Krstic, B. (2004) “Financial Transactions Globalization”, Economics and Organization, 2(2), pp. 127–132. Lai, K. (2006) “Developing Shanghai as an International Financial Centre: Progress and Prospects”, Discussion Paper 4, China Policy Institute, The University of Nottingham, February. Lash, S. and Urry, J. (1994) Economics of Signs and Space. London: Sage Publications. Laurenceson, J. and Tang, Kam Ki (2005) “Shanghai’s Development as an International Financial Center”, Review of Pacific Basin Financial Markets and Policies, 8(1), pp. 147–166. Leung, C. and Unteroberdoerster, O. (2008) “Hong Kong SAR as a Financial Center for Asia: Trends and Implications”, IMF Working Paper (WO/08/57), International Monetary Fund, March, Washington, D.C. Li, A. (2004) “Offshore Prospects Brighten for Hong Kong Banks”, Hong Kong: The Servicing Economy. Queensway, Hong Kong: Hong Kong Coalition for Service Industries.

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178 International Financial Centres in Asia Schenk, C. (2000) “Another Asian Financial Crisis: Monetary Links between Hong Kong and China 1945–50”, Modern Asian Studies, 34(3), pp. 739–764. Schenk, C.R. (2002) “Banks and the Emergence of Hong Kong as an International Financial Center”, Journal of International Financial Markets, Institutions and Money, 12, pp. 321–340. Securities and Futures Commission, Hong Kong Accessed on July 5, 2009. Securities and Exchange Commission. Introducing the SFC: Investors First. Hong Kong. . Shanghai Statistical Yearbook (2007) . Shanghai Statistics (2009). Spitz, B. (2000) International Tax Havens Guide: The Professional’s Source for Offshore Investment Information. San Diego, Calif.: Harcourt Professional Publications. Tan, K.H. (2001) “Singapore”, in Yun-Hwan Kim (ed.) Government Bond Market Development in Asia, p. 487. Manila, Philippines: Asian Development Bank. Tan, C.H. (2004) Financial Services in Singapore. National University of Singapore: Ridge Books. Tan, C.H. and Lim, Y.S. Joseph (2004) Singapore and Hong Kong as Competing Financial Centres. Saw Centre for Financial Studies, National University of Singapore, Business School. Tan, C.H. and Lim, Y.S. Joseph (2007) Singapore and Hong Kong as Competing Financial Centres. Saw Centre for Financial Studies, Number 2, National University of Singapore, Singapore. Taylor, P.J., Walker, D.R.F., Catalano, G. and Hoyler, M. (2002) “Diversity and Power in the World City Network”, Cities, 19(4), pp. 231–241. The Global Financial Centers Index: 5 (2009) The City of London, March <www. cityoflondon.gov.uk/economicresearch>. Tschoegl, A.E. (2000) “International Banking Centers, Geography, and Foreign Banks”, Financial Markets, Institutions & Instruments, January, 9(1), pp. 1–32. Tse, S.K. Maurice (2006) “On Challenges Facing Hong Kong as an International Financial Centre”, Hong Kong: The Servicing Economy. Hong Kong Coalition of Services Industries, Hong Kong Chamber of Commerce, September, pp. 1–2. Tucker, S. (2007) “Asia Seeks its Centre”, Financial Times, July, 6. Vlcek, W. (2009) “A Level Playing Field and the Space for Small States”, Journal of International Relations and Development, 12, pp. 115–136. Wang, D.T., Simon Xiaobin Zhao and Donggen Wang (2007) “Information Hinterland – A Base for Financial Centre Development: The Case of Beijing versus Shanghai in China”, Tijdschrift voor Economische en Sociale Geografie, 98(1), pp. 102–120. Wu, W. (1999) “City Profile: Shanghai”, Cities, 16, pp. 207–216. Wei, F. (1999) China’s Financial Sector Reform in the Transition to a Market Economy: Key Issues and Policy Options. Hamburg: Lit Verlag Munster. World Bank, Doing Business (2009) . World City Relational Data (1997–2001) . World Economic Forum (2009) “The Global Competitiveness Report 2008–2009” .

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5 Being Sandwiched: The Reshaping of ASEAN-China Food Trade Niels Fold, Jeff Neilson and Bill Pritchard

Introduction “The China question” casts a long shadow over the global food system. China’s WTO accession in 2001 and recent emergence as a major agrifood exporter have triggered widespread anxiety among rural producers worldwide. At the same time, the potential to find markets in the rapidly growing Chinese middle class represents a salivating prospect for food companies across the globe. Perhaps nowhere in the world has “the China question” loomed larger than in the ASEAN countries, given Southeast Asia’s sizeable agriculture-dependent population and the vital role played by agri-food sectors to ASEAN countries’ export earnings. Whilst governments in China and ASEAN have publicly embraced closer agri-food trade, this has been undertaken against a backdrop of concern within rural populations. Illustratively, at virtually the same time that the Thai government was heralding China as providing a golden opportunity for the country’s agricultural sector (Xinhua News Agency, 2005), farmers in northern Thailand were vociferously protesting against their local markets being swamped by imported Chinese fruits and vegetables (Voice of America, 2005). The purpose of this chapter is to bring analytical weight to the question of how the rise of China is affecting food and agricultural sectors in ASEAN countries. Trade flow data is analysed to identify key dynamics in the relationship, and from this, a framework model is developed to conceptualise the emerging food relations between China and ASEAN. This approach generates two key conclusions. Firstly, for ASEAN countries the great opportunities provided by China’s emerging appetite for imported foods is being funnelled into only a narrow band of product areas, of which most have minimal added value. The big areas of growth 180

Niels Fold, Jeff Neilson and Bill Pritchard 181

in China’s food import basket are in sectors such as livestock, some grains and high-quality, processed foods and beverages; areas in which ASEAN countries tend not to have competitive advantage. To the extent that ASEAN countries are agri-food suppliers to China, this is taking place in land-extensive, low-value tropical commodities such as palm oil, bananas, and tapioca. It should be noted also that non-food agricultural exports, such as ASEAN rubber, have also benefited significantly from increased Chinese demand. By and large, however, these products provide inputs for further processing within the juggernaut of the Chinese food production system. Secondly, Chinese food exporters are penetrating ASEAN markets on a range of fronts. China’s capacity to produce massive volumes of differentiated products at low cost threatens to devastate agri-food industries, and create increased food import dependency, across Southeast Asia. In an environment of increasingly fewer trade restrictions, Huang et al. (2004) suggest that trade liberalisation will further strengthen the trend towards increased production of labour-intensive products in which China has a comparative advantage compared to the landextensive production of grains and oilseeds. The continued production of grains and oilseeds, however, is ensured by China’s ongoing commitment to a policy of food self-sufficiency (despite some minor relaxations), as evidenced by the re-introduction of direct subsidies tied to grain acreage in 2004 (Gale and Huang, 2007). However, most nonstaple goods (vegetables, aquaculture products, fruit, meat, etc.) have been free of central planning during the 1980s and markets for these products operate with minimum interference from government intervention (Gale, 2002). Domestic and foreign investments are widespread in the production and marketing of these products, and the recent “meteoric” rise in the number and scope of supermarket operations in China has changed large parts of traditional procurement systems for fresh products based on wholesale markets. Instead, efficient marketing channels are being established between supermarkets and large firsttier suppliers who take responsibility for deliveries of many different types of products, some even running their own farms and managing comprehensive out-grower schemes as part of their activities (Hu et al., 2004). These somewhat solemn findings give cause to re-appraise ASEAN’s position within the global food system. In the 1990s, rapidly increasing agri-food export volumes from ASEAN (notably fresh and processed fruit and vegetables, seafood and poultry) brought forth the notion that the region’s member states were constituent members of an

182 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

international group of “new agricultural [export] countries”, or NACs. Coined with reference to the better-known notion of the “NIC” (“newly industrialising country”), the NAC concept spoke to the advent of dramatic improvements in transport and logistics in the late twentieth century that offered an agri-export led path towards middle-income country status. Through arrangements including air-freight systems, coolchain technologies and centralised logistics management regimes, perishable agri-food products could now reach far-distant markets in affluent consumer countries. Harmonisation of food standards and reduced tariff levels further accorded opportunities for the NACs. Southeast Asian exporters, especially from Thailand, were notable beneficiaries of these developments, and it has generally been assumed that the conditions that gave rise to the ASEAN NACs remain relevant to the present day. The material in this chapter challenges any such assumptions and questions the aggressive promotion of export-oriented agriculture as a rural development strategy by international financial institutions such as the World Bank, International Monetary Fund and the Asian Development Bank. Although cautious not to overstate the problematic position of ASEAN food producers, we contend that ASEAN is positioned in an increasingly problematic way within the global food system. At one level, the failures of WTO-led multilateral trade reform mean its economies face intense difficulties competing in product areas dominated by subsidised agriculture from North America and Europe, such as maize and sugar. Yet also, in product areas not subject to northern subsidisation (such as fruits, vegetables and seafood), its producers are being elbowed aside in domestic and export markets by intensified competition from China. In consequence, the resultant areas in which ASEAN producers can still maintain competitive advantage in world markets tend to be in land-extensive tropical products such as palm oil, cassava and coffee – however these are characterised by long-term declining terms of trade and relatively narrow opportunities for value-addition because of their subservient position in global value chains (Humphrey and Schmitz, 2002). Consideration of these broader world-historical implications of agrarian change is a necessary adjunct to analyses of ASEAN-China food relations. We present our argument as follows. The next two sections establish the scene for our trade flow analysis by, firstly, framing the consideration of ASEAN-China food trade within broader conceptual settings and, secondly, situating it within recent trade liberalisation initiatives at international and regional scales. This leads into consideration of recent pat-

Niels Fold, Jeff Neilson and Bill Pritchard 183

terns in bilateral food trade. On the basis of extensive examination of recent trade flows accessed through the COMTRADE database of the United Nations, we develop a framework which sets out the major components of the ASEAN-China food relationship. Subsequent sections of the chapter then review individual components of this framework, in turn. The final section of the chapter concludes by returning to the issues addressed above, namely, what this evidence suggests in terms of contemporary theorisation of global food politics.

The manufacturing sector as a rehearsal for ASEAN-China food relations Debates on ASEAN-China food relations rehearse arguments comparable to manufacturing. The general tenor of these arguments has proceeded as follows. In line with the “flying geese” model of East Asian economic transformation first articulated by the Japanese researcher Kanamane Akamatsu in 1962, China has followed the lead of the Newly Industrialising Economies (NIEs) and other ASEAN countries in embracing exportoriented industrialisation. As China has joined this fray, its low costs of production have enabled it to out-compete other East Asian rivals. Thus, during the 1990s, ASEAN countries lost market shares to Chinese manufactured products in major third-country markets such as the US, the EU and Japan. Even though the value of ASEAN exports in particular product categories did not decrease, their market shares eroded over time. This was particularly the case for labour-intensive and low-tech industries (clothing, footwear, etc.), where China’s heavy artillery of cheap manufacturing squeezed out competitors mercilessly (Wong and Chan, 2003). Yet these developments were not considered wholly disadvantageous for Asian competitors, because they were premised on the incorporation of China into an East Asian regional economy characterised by an intensification of trade and investment. The growth of assembly-line manufactured exports from China has been partly dependent on intermediate inputs, investment and technology sourced from other Asian countries. The extent of this pulling power is commonly characterised as the “compensatory dynamics” resulting from China’s emerging position as a global assembly factory (Roland-Holst and Weiss, 2004; Ravenhill, 2006). For analysts seeking to understand the emergent East Asian regional economy, a vital question has hinged on whether China’s compensatory dynamics will provide a significant growth stimulus for its neighbours. Following the approach of Cross and Tan (2004), this issue can be conceptualised as having one of three effects. Firstly, it is possible that China

184 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

will drain ASEAN of economic opportunities, owing to its lower costs and economies of scale (the “magnet effect”). Secondly, it is possible that after an initial “euphoric” period in which China takes opportunities from ASEAN, investments and export opportunities will flow back to ASEAN (the “neutral effect”). Thirdly, it is possible the compensatory effects of China’s growth will generate ASEAN economies with more new markets than those lost by new competition from China (the “benign effect”). Applying this set of arguments to the specific case of food and agriculture raises the twin questions of, firstly, whether China’s growing agri-export orientation is displacing ASEAN producers; and secondly, whether compensatory agri-food market opportunities for ASEAN have followed the rise of China. An illustrative case of displacement is provided by the changing production dynamics of canned tomatoes and tomato paste (together known as the processing tomato industry). During the past two decades there has been a process of successive industrialisation through Asian economies in search of lower cost production sites. In the mid-1980s, Taiwan was the largest processing tomato site in Asia. Then, in the early 1990s the industry moved, more-or-less en masse, to northeast Thailand. By the end of the decade, new opportunities in western China led to the closure of the Thai industry and its replacement in the provinces of Inner Mongolia and Xinjiang (Pritchard and Burch, 2003). By 2007, Chinese producers in Inner Mongolia and Xinjiang were producing almost 20% of the world’s processing tomatoes. This series of transitions underlines China’s capacity to out-compete other Asian countries in large-scale and high-value, agri-export production. Yet, if there is strong evidence for China’s productive agri-food potential, a more vexed question relates to the compensatory effects of Chinese economic growth for agri-exporters in ASEAN and elsewhere. Overall, dietary patterns in China are still characterised by a relatively high (above world average) per capita consumption of food grains (primarily wheat and rice), and vegetables and fish, whereas consumption of meat, dairy products, sugar and processed food remains low (Gale, 2002). However, at the same time, there is ample evidence that China’s recent growth has also stimulated considerable change in food consumption patterns and dietary habits, especially within the rapidly growing urban middle-class population (Hu et al., 2004). As an array of international food industry consultant reports attest, these trends potentially provide huge opportunities for high-value food exporters from ASEAN and elsewhere. The shift in demand and the prospects of increased food exports have been interpreted by some observers (Tongzon, 2004; Wong and Chan, 2003) as

Niels Fold, Jeff Neilson and Bill Pritchard 185

an important economic stimulant, thereby adding up to the – in terms of balance of trade concerns – compensatory effects. However, the potential for compensatory effects can readily be exaggerated. Arguing against the assumed size of these processes, Gale and Huang (2007) suggest that recent studies of food demand in China have overstated its pulling power on world food markets, pointing out that, with the exception of soybeans and vegetable oil, China has remained self-sufficient in most food products. The reason for this subdued demand, and the ability of China’s productive capacity to confidently outstrip demand, is attributed to the disproportionate share of income growth accruing to high-income households. These households are more likely to increase their food spending through higher quality consumption, such as better cuts of meat, pre-packaged food, out of home consumption, and heightened concerns over food safety. In contrast, income growth in rural and poor households (where growth would have a more significant impact on demand quantity) has been sluggish (Gale and Huang, 2007).

The role of international trade agreements in ASEAN-China food relations A second consideration when comparing the experiences of manufacturing and agri-food sectors relates to the institutional context of trade. Food and agriculture, in general, face a very different set of international trade rules than does the manufacturing sector. In the current context, an understanding of ASEAN-China food relations rests on appreciation of trade deals occurring at global and regional scales. At the global scale, the Chinese government continues to accord widespread “special treatment” to agriculture, notwithstanding a number of concessions made in relation to its 2001 WTO accession. At the regional scale are the negotiations with ASEAN to form a Free Trade Agreement (FTA). Developed in late 2002, the “Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China” proposes the progressive removal of tariffs eventually leading to a pan ASEAN-China common market by 2010 for the six old members of ASEAN (Singapore, Malaysia, Thailand, Indonesia, Philippines and Brunei), and by 2015 for the four new members (Viet Nam, Cambodia, Laos and Myanmar). Tariff rate reductions began in 2005 (Antkiewicz and Whalley, 2005; Cheng, 2004) with ongoing negotiations occurring over the extent of goods subject to the reduction/elimination of tariffs, the tariff schedules and the rules of origin. Significant progress on these

186 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

issues was signed-off at the 2007 ASEAN Leaders’ Summit in Cebu, the Philippines. For the issues of concern for this chapter, the critical significance of these regional trade agendas relates to the fact that food and agriculture was specifically identified as a “liberalisation leader”. In advance of the general provisions of the proposed ASEAN-China FTA coming into effect, signatories agreed to the “Early Harvest Program” (EHP); an agreement to cut tariffs on a range of specified food products ahead of the planned FTA in 2010. The EHP includes eight categories of agricultural products (HS-01 to HS-08) with certain exclusions by some countries. It was agreed that zero tariffs in the trade of these goods between China and individual countries should be negotiated as soon as possible and, at the latest, by 2006. From ASEAN’s perspective, the benefits of trade liberalisation are certainly far from being clear-cut at this stage. Within the ASEAN membership there is diversity of opinion over the gains of agri-food trade liberalisation with China. Thailand is the strongest advocate for SinoASEAN agri-food liberalisation, with the EHP being its brainchild; the Thai government had begun bilateral negotiations with China over these issues prior to their fuller discussions by all ASEAN members. Among ASEAN members, only Thailand met the EHP implementation timetable. Evidently, Thailand’s embrace of stronger Chinese agri-food trade relations was motivated by the presumption that it would capture “first-mover” advantages coming from its preferred access to the large Chinese market. Although the two-way trade in fruit and vegetables (the focus of the EHP) accounted for just 2% of total ChinaThai trade (Thai News Service, 2005), the export of fresh and processed foods has been a strategic priority within Thailand’s economic planning. Subsequently, all other ASEAN countries agreed to the EHP with the exception of the Philippines, which does not participate in it at all (Sally, 2005). Given the lead role of Thailand within the negotiations, it is worth considering the emergent China-Thai food relationship in greater detail. Since the early-harvest agreement on fruits and vegetables took effect on October 1, 2003, bilateral trade in the products has reached 29 billion baht (approximately US$800 million), of which Thailand has enjoyed a surplus of 13.2 billion baht (US$350 million). However, this outcome was heavily reliant on tapioca exports from Thailand (as discussed in greater detail later in this chapter) which remain the largest agri-food export from Thailand to China. Also central to this trade is the institutional presence of large supermarket buyers operating both

Niels Fold, Jeff Neilson and Bill Pritchard 187

in Thailand and China. One of the primary beneficiaries of the ThaiChina agreement is the Charoen Pokphand (CP) Group, Thailand’s largest agri-business conglomerate and also a major player in China’s rapidly changing retail landscape. From 2003 to 2005, CP’s fruit trade in China jumped tenfold to approximately 100 million baht (US$2.6 million) annually, as the group used their associated retail chain, Lotus Supercenter (with more than 50 outlets across China), as their principal marketing vehicle (Keeratipipatpong, 2005: B4). Agri-food trade liberalisation between the two countries, it would seem, may provide benefits for certain Thai corporate actors involved in diversified activities along the supply chain, although with more ambiguous benefits for agri-food producers in Thailand. In contrast to the single dominance of tapioca for Thai exports, Chinese agri-food exports to Thailand were mounted on a wider front, and had more disruptive impacts on the local rural economy. Harmonisation of food standards in the fresh fruit and vegetable trade, negotiated between the countries at Chiang Mai in October 2005, has facilitated “hassle free” market access by Chinese products into Thailand. The Sino-Thai relationship, however, has side-lined other ASEAN exporters to China, particularly Viet Nam. Whilst Thai exports to China have enjoyed zero tariffs since 2004, an average 27% tariff rate is applied on Vietnamese fruit exports. Government policies in Viet Nam have subsequently re-focused on negotiating their own accelerated EHP for agricultural goods with China.

Towards a framework for ASEAN-China food relations Notwithstanding the trade liberalising efforts of recent regional initiatives, the bilateral food trade between China and ASEAN is smaller than this history and geography might suggest. China exported a total of US$25.93 billion of food products in 2005, but of this, only US$2.2 billion was destined for ASEAN. And alternately, ASEAN countries exported a total of US$37.73 billion of food products to external markets in 2005, but only US$3.07 billion was destined for China.1 Therefore, two-way trade between these regional neighbours comprises less than 10% of their total food exports. Furthermore, the greater bulk of these flows are the outcome of a very recent confluence of events and, even now, it is concentrated in a relatively narrow sectoral band. Agri-food exports from ASEAN to China are dominated by palm oil, which has contributed over two-thirds of annual export value in the period since 1990 (Table 5.1, Figure 5.1). When palm oil is excluded from analysis, it is apparent that ASEAN is incurring

188 Being Sandwiched: The Reshaping of ASEAN-China Food Trade Table 5.1 ASEAN food exports to China, major flows, selected years, 1992–2005 (US$ millions)

Fruit

Cereals

Vegetable oils

Sugar

Others

Total food

8 1 58 53 71 75 76 115 104 141

32 186 274 125 120 83 104 97 224 195

397 904 652 840 584 596 1,087 1,660 2,176 1,839

16 123 129 26 15 101 30 30 47 42

61 81 124 96 101 119 158 208 291 381

553 1,414 1,571 1,491 1,051 1,160 1,644 2,376 3,221 3,067

Seafood Vegetables 1992 1994 1996 1998 2000 2001 2002 2003 2004 2005

24 114 327 328 142 81 80 132 150 153

15 5 7 23 18 105 109 134 229 316

Note: Major flows are exports exceeding US$100 million at least twice during 1996–2005 Source: UN COMTRADE database.

Figure 5.1

Two-way food trade between ASEAN and China

3500 3000

US$ million

2500 2000 1500 1000 500

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05

0

ASEAN to China Source: UN COMTRADE database

China to ASEAN

Niels Fold, Jeff Neilson and Bill Pritchard 189 Figure 5.2

The influence of palm oil – ASEAN’s food trade balance with China

1500 1000

US$ million

500 0 –500

1992

1994

1996

1998

2000

2002

2004

–1000 –1500 –2000 Total food

Excluding palm oil

Source: UN COMTRADE database

Table 5.2 Chinese food exports to ASEAN, major flows, selected years, 1992–2005 (US$ millions) Seafood 1992 1994 1996 1998 2000 2001 2002 2003 2004 2005

6 25 22 17 23 34 75 114 161 113

Vegetables

Fruit

Cereals

Oil seed

M&F (prep.)

F&V (prep.)

Others

Total food

65 121 90 64 88 148 229 270 344 470

33 65 121 111 136 126 177 234 288 350

232 241 33 797 504 226 502 649 105 115

164 293 127 66 73 70 109 114 97 115

33 37 43 45 60 64 86 110 231 281

36 62 72 44 74 76 103 139 160 168

229 310 330 300 280 363 483 457 528 585

798 1,154 838 1,444 1,238 1,107 1,764 2087 1,914 2,197

M&F = meat and fisheries F&V = fruit and vegetables Note: Major flows are exports exceeding US$100 million at least twice during 1996–2005 Source: UN COMTRADE database.

190 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

a progressively larger bilateral food trade deficit with China (Figure 5.2). In contrast, China’s food exports to ASEAN are more broadly based, cutting across a range of sectors (Table 5.2). This overall pattern distils into the framework presented in Table 5.3. This framework explains major agri-food trade flows by way of their underlying guiding processes. A basic distinction in the framework is between trade flows connected to the growth of market-oriented, large-scale agriculture in China (“Process 1”), and the compensatory effects of Chinese demand stimulating ASEAN export opportunities (“Process 2”). As is evident in the table, both processes generate a number of disparate effects. The following discussion focuses on these various trade effects, providing an elaboration in each case of how particular constellations of national, regional and global politics have produced the sector-specific outcomes listed in the table.

Increased penetration of Chinese food exports into ASEAN The juggernaut of Chinese agri-food exports has flowed into ASEAN, displacing both local producers and other import competitors. Three

Table 5.3

A framework to account for ASEAN-China food trade

Process

Trade effects

Examples

1. Growth of marketoriented, large-scale agriculture in China

(a) Increased penetration (i) with negative effects for of Chinese exports present-day ASEAN into ASEAN producers: Garlic (ii) replacing food imports from third countries: Apples, mandarins (b) Delimiting ASEAN opportunities acrossthe-board

2. Compensatory effects of China’s growth

Seafood

(a) Increased ASEAN Palm oil, tapioca, grains exports of raw and semi-processed agricultural products for further processing in China (b) Fresh tropical fruits

Litchi, longan, bananas

Niels Fold, Jeff Neilson and Bill Pritchard 191

cases highlight these tendencies. The garlic case exemplifies the story of how Chinese exports are displacing local producers in their home markets. The apple case exemplifies the story of how Chinese exporters are taking trade from other competitors, notably in this case, the US. Finally, the seafood case exemplifies the story of how Chinese growth is delimiting ASEAN opportunities, across local, Chinese and thirdparty markets. Shooting the bystander: ASEAN and the pan-Pacific garlic wars Garlic constitutes approximately three-quarters of Chinese fresh vegetable exports to ASEAN over the period 1992–2005. In 2005, fresh garlic exports from China to these countries amounted to US$221 million, representing an increase of 27% on the previous year. Yet importantly for this analysis, this increase in trade does not show evidence that Chinese garlic producers target Southeast Asia. Instead, what it reflects is a process by which ASEAN garlic demand has been caught up in a wider pan-Pacific “garlic war” between China and the US. The ASEAN garlic growers who have lost local markets under the onslaught of Chinese competition have become collateral damage within this attendant globalscale reorganisation of global garlic production. In a relatively short space of time, China has emerged to become the world’s largest garlic exporter. China became a major player in the world garlic trade during the 1990s, as exports increased from 124,000 tonnes in 1990 to 455,000 tonnes in 2000. In the new millennium, however, Chinese garlic exports have taken off to a new level, with the benchmark of one million tonnes reached in 2002. The US was the key export destination for Chinese garlic. Exports to the US grew rapidly in the early 1990s, prompting American producers to petition the US International Trade Commission (ITC) for antidumping duties to be levied on Chinese fresh garlic imports. Producers alleged that Chinese garlic was being dumped into their markets in contravention to the safeguard and anti-dumping provisions of the General Agreement on Tariffs and Trade (GATT). The US ITC recommended that countervailing duties of 376.6% be applied to Chinese fresh garlic imports to the US, a recommendation which was signed into law by President Clinton in 1994. In 2001 and 2006 these levies were renewed, meaning that Chinese garlic exports to the US have now been subjected to harsh import restrictions for more than a dozen years. Additionally, during the past decade the EU, South Korea, Canada and Israel have implemented countervailing duties seeking to stem the flow of allegedly dumped Chinese garlic.

192 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

Immediately upon the American 1994 decision, there was a decline in US imports of Chinese fresh garlic. US garlic imports from China fell from 685 tonnes in 1995 to just 93 tonnes in 1996. However, during the remainder of the 1990s imports of Chinese garlic crept upwards again (reaching 666 tonnes in 1999) before exploding in 2001, when 3,598 tonnes were imported; and then increasing tenfold again by 2004, with 38,995 tonnes (FAOSTATS). Preliminary data for 2006 indicate that Chinese garlic exports to the US reached 58,182 tonnes (San Francisco Chronicle, 2007). The fact that this growth occurred in the context of harsh antidumping penalties underlines the ease to which Chinese exporters have found loopholes in the administration of these trade restrictions. Chinese garlic exporters have avoided paying duties by setting up numerous “shelf companies” to handle their exports. Whenever one Chinese garlic company is invoiced for duties, the goods are shipped through another company. As a result, by 2004, the US Customs Service had $25 million in unpaid invoices to Chinese garlic exporters (Los Angeles Times, 2005). In addition to the outright non-payment of invoices, Chinese garlic exporters also appear to have avoided US antidumping duties by trans-shipping their product through third countries to disguise their country of origin. According to representatives of the US garlic industry, Thailand has been a vital cog within these fraudulent practices. In 2002, the legal counsel to US garlic producers alleged: “There’s been a ferocious increase [in garlic imports] coming in shipping containers supposedly filled with Thai garlic, and there’s no way that the product coming in is actually Thai” (Mendoza, 2002, n.p.). This context provides two sets of explanations for the recorded rise in Chinese garlic exports to ASEAN. Firstly, large-scale export-oriented garlic production in China, developed pre-eminently with the US market in mind, generated globally competitive production systems. Whether or not these systems operate in contravention to GATT/WTO rules of trade, the fact that China has become the world’s pre-eminent garlic producer has reverberated across global markets, including ASEAN. Secondly, the trade politics associated with the China-US garlic dispute seem to have encouraged the diversion of Chinese garlic exports to ASEAN. Additionally, it is also the case that the imposition of antidumping duties in the mid-1990s had a trade diversion effect leading to increased volumes of Chinese garlic being exported to Southeast Asia. Establishment of these markets then provided a beach-head for exports in future years.

Niels Fold, Jeff Neilson and Bill Pritchard 193

China becomes the global apple Emperor As consumer incomes in ASEAN have increased, demand has grown for temperate fruits, notably apples and, to a lesser extent, pears and mandarins. Located in the tropics, ASEAN has very limited capacity to grow these products, and demand has traditionally been satisfied mainly by US producers. Until recently, that is, when Chinese exporters have captured these markets. Production of apples, pears and citrus in China has expanded tremendously during the recent two decades. In 2006, the total production of apples reached about 25 million tonnes grown on about 1.9 million hectares of orchards (production volumes of pear and citrus were also significant, at 15 and 11 million tonnes respectively). Massive apple plantings started during the late 1970s, spurred by agrarian reforms as well as subsidies from the Central government and Japanese trading companies who wanted to establish cheap sources of deciduous fruit for imports to Japan. Apple and pear production were particularly encouraged in mountainous and hilly regions as climatic conditions are more suitable and returns are higher in these areas than those for traditional grains production. Beside the quantitative expansion, general quality has increased for both apples and pears since the early plantings of relatively inferior varieties. During the recent decade, the number of different varieties has been reduced in newly planted areas and in replanting on existing orchards (Sanchez and Bugang, 2006). Production of apples is now concentrated on varieties that are traded on the world market, such as Red Fuji (60% of total area), Gala, Jonathan, and Golden Delicious. The Central government, along with provincial agricultural agencies, has actively identified appropriate areas to allow the harvest to be spread throughout the year, thus avoiding unmanageable surplus production. China became the world’s largest apple producer in the early 1990s, and in 2003 overtook the US as the largest exporter. More than half of these exports, notably the higher priced varieties, are directed to the ASEAN countries, whereas the lower priced apples are exported to Russia. Prior to the 1997 Asian financial crisis, the US was the main supplier of these higher value apples to Southeast Asia, but lost market share to China, where product quality was similar, but prices considerably lower. The story of China’s capture of global apple markets is now being extended to other deciduous fruits, notably mandarins. ASEAN is easily the most important market for Chinese mandarins, although the overall value of the trade is much less than for apples (except in Malaysia). Beside an impressive expansion of acreage and production volume, quality has

194 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

improved due to the partial implementation of standardised farm practices set by provincial governments (Sanchez et al., 2006). For the citrus industry these include recommendations on tree density, application of fertilisers and pesticides, and orchard management. The aim is to transform the industry away from earlier short trunk trees, dense plantation and early bearings, focusing instead on high production and quality. New orchards – and replanting of old orchards – take place using internationally competitive varieties. Modern post-harvest treatment is more common, and many new packing lines and cold storages have been established in the major producing regions to source over an extended supply season. Most of the mandarin exports to ASEAN countries are handled by large-scale companies that contract out production and organise all the post-harvest activities such as sorting, waxing and labelling. The ability of Chinese fruit producers to penetrate ASEAN markets, therefore, has emerged amidst a climate of government support structures, particularly with regards to the market-driven R&D, industry-wide coordination and logistical infrastructure. With significant comparative advantage, based primarily on climatic factors, Chinese exports are a reliable supplier of growing ASEAN markets. With limited displacement of local industries in the ASEAN countries, this case represents apparent consumer benefits at the expense of third-party competitors. An ocean of change: The Chinese competitive threat to ASEAN seafood industries In 2002, China overtook Thailand for the first time to become the world’s major exporter of fish and fishery products, and by 2004 its total exports were valued at US$4.5 billion. Indeed, by 2000, fisheries had already become the largest single contributor to Chinese food export earnings (Chen, 2001) as well as the fastest growing component of Chinese agriculture over the past two decades (Li and Huang, 2005). This growth was fuelled by cost-efficient production supported by progressive research and development agencies. Aquatic products were considered a non-strategic food commodity in the nation’s food security system, such that China’s fishery and aquaculture sectors have been relatively free from government price controls and intervention since early in the 1980s. Compared with prices of other agricultural commodities, the domestic prices of most aquaculture products in China are well below world prices. This suggests that unless trade is disrupted by food scares coming out of Chinese aquaculture (which is a legitimate concern), China’s share of world fisheries trade is expected to further increase in the future.

Niels Fold, Jeff Neilson and Bill Pritchard 195

The general level of trade in fisheries products between China and the ASEAN countries is insignificant relative to their total respective exports. Exports of unprocessed fishery products (HS-03) from China to the ASEAN countries constituted less than 1% of total Chinese seafood exports over the period 1990–2000, and were worth only US$23 million in 2000. The period 2000–2005 has seen some growth in this trade, which peaked at US$161 million in 2004. However there is an important caveat here. There are two primary components of Chinese seafood exports to ASEAN countries: frozen shrimp and whole frozen fish. The sudden expansion of shrimp exports to various ASEAN countries from 2002 to 2004 was due to an EU ban on Chinese shrimp because of food safety concerns, which meant that Chinese shrimp were temporarily being channelled through ASEAN countries into the world market. Shrimp exports from China to the ASEAN countries (themselves major shrimp exporters) have fallen after the lifting of the EU ban in 2004 (although reexports are still occurring through Indonesia and Malaysia due to an antidumping US tariffs on Chinese, Thai and Vietnamese shrimp exports). Chinese exports of whole frozen fish, particularly to Indonesia, Malaysia and the Philippines, are the other major seafood export to ASEAN countries, and have increased steadily since 2000, yet were still only worth US$56 million in 2005. In many cases, China and the ASEAN countries are competing for the same major export markets in the US, Japan and the EU. In this context, during the 1990s, ASEAN became a significant source of raw seafood product for re-processing in China and sale to third markets, however as time has gone on, the importance of this trade has waned. The sale of raw seafood product to China averaged 8% of total ASEAN seafood exports over the last decade, inclusive of the significant volume of seafood products sold through Hong Kong, which is roughly equivalent in value to that sold directly to mainland China. The value of ASEAN-5 seafood exports to China reached a peak of nearly US$600 million in 1996, consisting mostly of frozen shrimp and frozen whole fish exports from Thailand, Malaysia and Indonesia. This has since declined to US$354 million in 2005. Most of these unprocessed products are for re-export, as 76% of the total volume of seafood imports to China consist of raw materials for processing, valueaddition and re-export (FAO, 2004). In terms of origins, since 2003, Indonesia has surpassed Thailand as the most important ASEAN source country for unprocessed seafood products into China. Yet, at the same time that the Chinese fisheries sector is weaning itself from reliance on ASEAN raw seafood imports, its processed seafood

196 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

exports are finding increasingly more lucrative markets in Southeast Asia. The value of Chinese processed seafood exports to ASEAN grew from US$11 million in 1999 to US$220 million in 2005, the vast majority of which constituted processed shrimp sold to Malaysia and Singapore. Indeed, exports of processed fisheries products from China to all countries were worth more than US$3 billion in 2005, dwarfing ASEAN countries’ contributions. The ASEAN countries, it would seem, are struggling to compete with China in third-country markets for both raw and processed seafood products, whilst themselves developing into important destinations for processed Chinese seafood.

Compensatory opportunities? The second part of Table 5.3 describes the compensatory opportunities for ASEAN agri-food producers arising from the massive growth of the Chinese economy. These comprise, firstly, products that represent agriinputs for further processing in China, and secondly, niche markets for fresh fruits. In general, the former category of products tends to have low levels of value-addition and is sold as bulk commodities. The second category tends to be high-value/high-risk products. China’s insatiable demand for palm oil Palm oil exports from Malaysia and Indonesia is by far the most important agri-food product flow from ASEAN to China. Aggregate exports from the two countries were substantial, but fluctuating, throughout the 1990s with Malaysia constituting the lion’s share. Exports boomed in 2002–2004, reaching a combined value of almost US$2.2 billion, reflecting massive increases in exports from both countries, but still being dominated by Malaysian palm oil. Chinese imports from Malaysia started during the 1980s when Malaysia re-oriented and transformed exports away from unprocessed palm oil sold into traditional European markets towards exports of processed palm oil to numerous developing countries. The successful re-direction and expansion of exports concurred with technological upgrading and diversification of the Malaysian palm oil industry, a result of careful state management that included: 1) implementation of graduated export taxes (decreasing with the degree of processing), 2) stimulation of institutional consolidation (such as R&D activities, marketing intelligence, industry associations),

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3) conversion of privately-owned plantations to state-controlled enterprises, and 4) financing of smallholder schemes, both within a framework of re-settlement on state-owned (virgin) land (FELDA) and in the form of in situ programmes including extension and logistical services for sedentary farmers in existing villages (Fold, 2000).2 In comparison, Indonesian exports to China rose sharply in the early 1990s and then slowly increased up to the turn of the century. Compared to Malaysia, national policies in Indonesia prioritised the (tentimes larger) domestic market by operating a system of consumer price controls and export taxes in order to secure available and affordable volumes of cooking oil – considered as an “essential commodity” by the government – for the Indonesian consumers, while concerns for export revenue came second (Hasan et al., 2001; Voituriez, 2001). Hence, the export tax was used for securing internal economic and political stability, increasing state revenue, and as a means for accruing rents by domestic processors, rather than as a policy instrument for structural change of the industry. When refiners in the industrialised countries were unable to source crude palm oil in Malaysia during the 1980s and 1990s, Indonesia filled the void. The Indonesian government also aimed to improve smallholder income by promoting the nucleus estate concept (in which smallholders were linked to the management and services of state or privatelyowned large-scale plantations) or by providing support to individual farmers in selected project areas. However, the results were not comparable with the Malaysian schemes, partly because the socio-economic and agro-climatic context in Indonesia is much more varied and therefore requires flexible organisational systems that are difficult to implement, and partly because the available financial and human resources (for management, extension, settler selection, etc.), were inadequate (Zen et al., 2006). State regulation has been reduced since 1998, foreign trade gradually liberalised, and foreign plantation capital, primarily from land and labour constrained Malaysia, has responded with massive investments in new plantations in Sumatra and Kalimantan (Rittgers and Meylinah, 2006). Palm oil from the two ASEAN countries is in high demand in China, where manufacturers in food and non-food sectors are continuously searching for the cheapest alternative among the vegetable oils that are technically feasible for their requirements. Most of the imported palm oil is sold as cooking oil but increasing volumes are used in the

198 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

processed food industry as a frying medium, particularly in the production of instant noodles. Consumption of instant noodles of various types has exploded in China during the recent decade: it is estimated that about 10% of domestic wheat production is used by noodle manufacturers (Qingzhe, 2006). In addition, palm oil is widely used in the rapidly growing fast food sector, noting also that China is now the second largest global market for McDonald’s and KFC. Palm oil is important in the production of French fries, potato chips, biscuits and cakes, and it is expected that palm oil will replace other vegetable oils in the manufacturing of traditional Chinese snacks, a potentially huge market mainly catering for the middle and old aged population. Another 25% of palm oil imports are used by the non-food, oleochemical industry for production of consumer goods such as soap and detergents. In addition to this existing demand, yet another and even more spectacular non-food driven surge in Chinese palm oil demand is expected to materialise in the coming years as demand for bio-diesel grows (Ji, 2007). In addition to ethanol, bio-diesel constitutes a second leg of China’s longterm renewable energy plan. Palm oil appears to be the most suitable raw material for bio-diesel at existing technology and productivity levels.3 With high oil prices and increasing concerns over national supply security, global demand for bio-diesel is expected to increase and prices of palm oil to rise accordingly. Malaysia and Indonesia are reportedly negotiating plans for the establishment of a cartel-like strategic alliance by allocating 40% of their aggregate palm oil production for bio-diesel production, giving them a dominating (90%) control over global supplies (Hoh, 2006). Chinese companies, on the other hand, are attempting to secure raw material supplies from ASEAN countries for bio-diesel and other traditional uses. An example of this is the current round of negotiations with the Indonesian government to establish what would become the world’s largest palm oil plantation (about 1.8 million hectares) with processing facilities along the mountainous border with East Malaysia. These plans, however, are vehemently opposed by environmental groups due to the devastating effects it would have on one of the richest areas of biodiversity on Earth, the unique ecosystems in the “Heart of Borneo” (Perlez, 2006). Palm oil exports from ASEAN countries, therefore, present a case of land-extensive production complexes providing raw materials for food and non-food industrial development in China. Deindustrialisation of the Thai tapioca complex Until the turn of the century, China was insignificant as a market for tapioca from ASEAN countries. However, in 2001, exports from

Niels Fold, Jeff Neilson and Bill Pritchard 199

Thailand steeply increased to about US$100 million and reached almost US$300 million in 2005. During the same period exports of tapioca from Viet Nam increased in a similar way to a maximum value of US$50 million in 2005. Indonesia also now exports tapioca to China, although in comparison with Thailand and Viet Nam, Indonesia’s considerable production is channelled into its domestic market. The recent growth in the Chinese market for tapioca saved the Thai industry from an imminent crisis, brought about by the loss of the formerly dominant EU market. The EU market was established in the 1960s. Initially, these exports were in the form of tapioca chips (cut and dried pieces) which started to replace expensive grains in manufactured feed for large-scale pork production. Then, exports shifted towards more processed products in the mid-1980s as chips were gradually replaced by pellets, due to customer requirements for storability and transportability and new EU regulations banning high levels of dust and dirt in port operations. The subsequent decline in the EU market (imports to the Netherlands, for example, fell from almost 2.5 million tonnes in 2000 to about 700,000 tonnes in 2004 (Caldier, 2005)) was due primarily to falling grain prices in the EU, which in turn were the consequence of global oversupply and a reduction of the guaranteed price paid to EU producers. Already during the mid-1990s, Thai tapioca had lost some of its former competitiveness as animal compound feed producers in Europe started to use maize, a cheaper alternative (Fuglie, 2004). This decline was further exacerbated by the increasing costs of protein feed (notably soybeans and fishmeal) – necessary in a balanced feed ration – which were disadvantageous to the demand for tapioca (which is a carbohydrate source with lower protein content compared to grains). The EU market, however, served as a major lever for the spectacular expansion and diversification of the Thai tapioca industry over the last four decades. During the 1990s, the Thai industry underwent substantial structural changes, as numerous locally-owned, small-scale, chip processors and pellet factories were supplemented with more advanced, frequently foreign-owned (or joint venture), operations with activities geared towards starch production. These companies used improved, highstarch content, varieties of tapioca, increasingly grown in new production sites in Thailand’s Northeast (Sriroth et al., 2001). Substantial volumes of starch from Thailand are exported to industrial customers in East Asia, primarily in Japan and Taiwan, who use it as ingredients in food industries (noodles, ice cream and other desserts, etc.) as well as non-food industries (adhesives, plywood, pharmaceuticals, textiles).

200 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

According to Fuglie (2004), many of these final goods are characterised by high-income elasticity which transform into high growth potential. The Thai tapioca industry – with dependable high-volume supplies, manufacturing competence and price competitiveness – was then able to seize new opportunities offered by growth in the Chinese market. Imports of starch-based products and raw materials for animal feed were initiated on a grand scale in 2001, the year of China’s accession to the WTO, and China is rapidly developing into the most important market for Thai tapioca ahead of the EU. Apart from some Thaiprocessed starch, however, exports to China are mostly in the form of tapioca chips, which are further processed in China into animal feed and ethanol. Imports of tapioca reduce pressure on China’s domestic supplies of maize (an important food staple in some areas, but more importantly a key component in animal feed). As meat consumption, particularly pork, is expected to grow rapidly due to dietary shifts, large-scale pig breeding activities based on manufactured feed will take over from the present form dominated by small producers who rely heavily on farm-grown feeds (Fuglie, 2004). The demand for tapioca as an industrial livestock feed is likely to present continued opportunities for ASEAN exporters. Tapioca is also a crucial element in the Chinese government’s ambitious plan to increase domestic supplies of ethanol for biofuel production. China aims to meet 15% of total energy consumption with renewable energy by 2020 (Ling, 2005). The aim is to reduce China’s growing dependence on imported fossil fuels by targeting privatelyowned vehicles. The stock of private vehicles is booming as a consequence of higher incomes, particularly in the coastal provinces (Latner et al., 2006) some of which have been told to include 10% ethanol content in the gasoline. By 2006, four large-scale, government-owned, factories were producing ethanol, all located in the Northeast of the country (Latner et al., 2006). Three of these are based on maize and one on wheat, thereby undercutting grain food security. Subsequently, construction has commenced on a tapioca-based factory located in the autonomous region of Guangxi in Southern China, with plans afoot for others. Operations in Guanxi are planned to commence in October 2007, reaching full capacity (one million tonnes annually) by 2010. Whilst the market opportunities for ASEAN tapioca producers certainly appear promising, Chinese government efforts to provide incomegenerating activities to the 30 million relatively poor farmers in Guangxi, (on top of traditional sugar production) may help substitute imports. The regional authorities plan to add 400,000 hectares to the 220,000 ha

Niels Fold, Jeff Neilson and Bill Pritchard 201

already planted with tapioca in Guanxi (60% of China’s current production). Chinese grain policy and ASEAN rice exports It was widely predicted that WTO accession would eventually result in a decline in China’s grain self-sufficiency (Huang and Chen, 1999; USDAERS, 2000). China, however, has maintained a net grain trade surplus with ASEAN countries for much of the last two decades (Tables 5.1 and 5.2). The partial liberalisation of Chinese grain markets since 2001 has yet to deliver significant benefits to ASEAN exporters. This is due primarily to a lack of complementarities in the major grains being produced in ASEAN. Thailand and Viet Nam are the world’s first and second largest rice exporters, with annual exports averaging eight million and 4.5 million tonnes, respectively, over the last decade. This apparent comparative advantage might suggest potential opportunities associated with enhanced trading relations with China. In turn, however, China is easily the world’s largest rice producer (at an estimated 125 million tonnes annually), and, with the exception of 1995 and 1996, China has continually maintained its status as a net exporter of rice in recent decades. China is also currently the world’s largest producer of wheat and the second largest producer of maize. As yet, the growing Chinese appetite has not had a significantly positive impact on ASEAN rice exports. Ever since the Peoples Republic of China experienced massive grain shortages in the 1940s and 50s, national food security has been a highly strategic and extremely sensitive concern in China, with trade flows continuing to be shaped by domestic policy in this regard. Due to concerns over domestic grain shortages in 1994 and 1995, China encouraged large volumes of grain imports, whilst promoting efforts to increase domestic production in 1995 (Tian et al., 2004). These concerns appear to have been driven more by panic buying and hoarding rather than actual shortages, and China’s positive trade balance in grains was quickly restored, with record grain production levels reached in 1996. Subsequent over-production and sluggish world grain markets resulted in heavy losses to the State Grain Marketing Enterprises in the late 1990s, as the government restricted imports and provided export subsidies to dispose of excess production (Zhou and Tian, 2004). Subsequent WTO accession has led to the elimination of direct export subsidies and a gradual de-regulation of domestic procurement protection prices. However, indirect supports persist, such as direct subsidies tied to grain acreage (estimated at US$1.4 billion in 2004),

202 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

various input subsidies, heavy investment in rural infrastructure, agricultural tax exemptions, and transport subsidies (Orden et al., 2007). Thai officials, for example, have complained that non-tariff barriers still continue to block imports of rice from Thailand which they claim could reach about one million tonnes annually (Vanichanont, 2004). Thailand was able to temporarily benefit from Chinese grain policy in the 1990s, as rice exports to China boomed during the period 1994–1997. Subsequently, however, Thai rice exports have stabilised at about US$100 million a year during the period 1998–2003, with Thailand holding an almost exclusive position as a rice exporter to China. This trade is mainly destined for urban markets catering for diverse tastes rather than the bulk end of the market. Thai rice exports increased slightly in 2004 due to poor weather conditions in China and amidst fears of a major grain shortage in China (which again did not in fact eventuate). Import dependence was swiftly allayed by the government auction of stocks accumulated during the late 1990s. More recently, Thailand has ventured into government-to-government barter deals with China, such as the exchange of Thai rice (a value of US$25 million) for seven Chinese trains (Thai News Agency, 2005). This is considered as a means to dispose of large publicly-owned stocks of rice (accumulated while offering Thai farmers a fixed farm-gate price) without inflicting negative impacts on export prices. Whilst Thai rice exports to China have not been insignificant, this has been overwhelmed by the counter-flow of grains from China to ASEAN. In particular, China has exported significant volumes of maize to Malaysia and Indonesia, and also lesser volumes of wheat to the Philippines and Viet Nam (Tian et al., 2004). Whilst China is anticipated to significantly increase imports of maize, soy and possibly wheat in the coming years, it is likely to continue as a net rice exporter (Huang and Chen, 1999). As a result, opportunities for the ASEAN rice-exporting economies will remain limited. Furthermore, with an emergent politics of rice associated with debates on genetic modification, the Chinese market may be a declining attraction for ASEAN rice exporters. Thai rice, which is currently free from genetic modification, seized new market opportunities in Europe in July 2006 when illegal and unapproved genetically engineered (GE) rice was discovered in a shipment from the US (Greenpeace, 2006). Since the discovery, rice from the US has been effectively banned from 16 EU countries and from Japan. At that time, major rice traders in Thailand and Viet Nam had agreed to shun GE varieties, mirroring a

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decision by Indian rice exporters to support a ban on GE-rice field trials. This position is in contrast to the Chinese plans with GE-rice. Although no definite decision about full-scale production of a new GE-variety has been announced in public, the Chinese authorities have approved several varieties for human consumption. Production of GErice is considered a means to maintain self-sufficiency and to expand export markets in China (Mohanty, 2005). In these contexts, it will be certainly more lucrative for ASEAN’s major rice exporters to focus future rice markets on those countries which give preference to GE-free products rather than look to the uncertain potential of the Chinese markets. Niche tropical fruits: Bananas, longan and litchi Whilst the total value of ASEAN fresh fruits exports to China is significantly less than that for either palm oil or tapioca, the ASEAN countries are the most important supplier of fresh fruits to China, accounting for 72% of total Chinese imports (APCAEM, 2007). Bananas are the single most important commodity amongst these (valued at US$116 million in 2006), and are almost exclusively sourced from the Philippines. Production of bananas for export in the Philippines started in the late 1960s when major global players, such as Dole, Del Monte Fresh Produce and Chiquita, established large-scale plantations for low cost production and supply to the Japanese market (Arias et al., 2003). Intensive production since the early 1980s, particularly on Mindanao Island, has allowed the Philippines to become the world’s second largest banana exporter, and one of the largest producers due to a considerable domestic market. The principal market continues to be Japan (about two-thirds of total exports), followed by China, Korea, Taiwan and the Middle East. Whilst Chinese banana imports from the Philippines have steadily increased over the last decade, there are also some concerns that expanding Chinese production, estimated at six million tonnes in 2006 (APCAEM, 2007), may eventually be sufficient to meet domestic requirements, resulting in falling import requirements. China also imports US$181 million of “other fruits” (HS-0810), 90% of which is imported from the ASEAN countries. This category is mostly composed of niche tropical fruits, such as longan and litchi, and, to a much lesser extent, guava and mango; almost all of these imports are currently from either Thailand or Viet Nam. Fresh litchi and longan (both actually native to Southern China) are the primary drivers of the ASEAN to China fruit trade, with exports from Thailand alone worth almost US$60 million in 2005. In addition, exports of

204 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

dried products have fluctuated at a level of about US$30 million since the turn of the century. Thailand seems to have benefited from the early removal of Chinese tariffs and has been able to more easily meet the Chinese sanitary and phytosanitary (SPS) standards (imposed in 2005) due to a longer history of supplying the EU markets. Scattered evidence in news reports indicate that a number of non-traditional trade mechanisms have been established in order to rapidly increase exports of fresh and dried litchi, including barter trade deals involving armed vehicles from China to Thailand, supply agreements with Chinese provincial authorities, and the setting up of regional import agencies in China by Thai state institutions. The trade in these products is notoriously risky, due to their short shelf-life. According to one report: “Thai exporters grumble that China uses non-tariff barriers such as long delays in customs clearance to keep out perishable Thai tropical fruit such as mangoes and papayas” (Hiebert, 2005: A19). Viet Nam is another major fresh fruit exporter amongst the ASEAN countries, and 80% of Vietnamese fruit exports are destined for China (Nguyen, 2006). Commercialisation of fruit production has been widespread in the Mekong Delta region, expanding rapidly after 1998 due to the strong Chinese demand for litchis and longans. Viet Nam did not gain the early preferential market access to China enjoyed by Thai fruit exporters, and has experienced greater difficulties meeting the strict SPS regulations. This resulted in a moderate decline in official Vietnamese exports to China in 2005. However, with its long and porous border with Southern China, Viet Nam has managed to sustain overland trade through entry points where quarantine procedures are not as onerous as in central China. Through a programme of specialised fruit production areas and support for supply chain infrastructure, the Vietnamese government, along with the Vietnamese Fruit Producers Association (VinaFruit), have ambitious plans to expand fruit and vegetable exports to a value of US$1 billion by 2010 (Nguyen, 2006). Their ability to expand access to the Chinese market is a key cornerstone of this plan.

Conclusion The trade flow analysis and further analytical research presented in this chapter fleshes out the detail of the China-ASEAN food relationship. Our key point is that the rise of China is proving more threats than blessings to the ASEAN food economy. Although ASEAN runs a healthy trade surplus in food with China, the vast majority of this is contributed by one product only – palm oil (which is increasingly being

Niels Fold, Jeff Neilson and Bill Pritchard 205

converted to non-food industrial uses). ASEAN’s food trade surplus with China has grown in proportion to the expansion of the “palm oil frontier” into the rainforests of Indonesia and Malaysia. If palm oil is excluded from the two-way food trade, it becomes clear that ASEAN is running a progressively larger food trade deficit with its giant northern neighbour. Moreover, this is constituted by a diverse range of products. Subject to difficult-to-predict questions relating to Chinese food safety and potential retaliatory actions under the WTO, China is becoming “the world’s farm”. As it ratchets up production scales to capture global markets, its products find ways into ASEAN countries and delimit opportunities for ASEAN food exporters in third countries. The instances of processing tomatoes and shrimp, both mentioned in this chapter, exemplify these tendencies. In both cases, growth of ASEAN-based exports during the 1990s has waned against the onslaught of Chinese competition. Also mentioned in this chapter, the diversified Thai tapioca complex, with a variety of processed starch products, has now seemingly reverted to exports of raw chips and pellets driven by Chinese industrial demand. Casting these developments in larger contexts, they illustrate the enormous effect of China in terms of re-organising the world food system. China is significant on the world agri-food stage because it provides a competitive threat across a vast range of product areas from different climatic zones: among others, its rise imperils garlic producers in California, tomato paste processors in Italy, tea planters in Java, banana growers in the Philippines, apple orchardists in Oregon, and seafood processors in Thailand. A model of future economic growth as new agricultural countries (NACs) now seems an increasingly unlikely scenario for the ASEAN countries. China’s continuing influence in the world food system suggests a need to reconceptualise the global politics of food. The inauguration of the World Trade Organisation encouraged a view of the global food system through the prism of a battle between subsidised northern agricultures, and agri-exporter countries in Australasia and the global South. China’s rise complicates this dynamic. It is not a natural supporter of agricultural free trade – the state remains the central organising agent in its rural economy – but it has become one of the world’s most successful agri-exporters. As the size of China’s agri-food exports expands further, the dichotomised rendering of the global politics of food between “subsidisers” and “agri-exporters” becomes increasingly ill-suited to describe emerging realities. Global analyses of the politics of food will need to consider China with increasing centrality because,

206 Being Sandwiched: The Reshaping of ASEAN-China Food Trade

as the discussion of ASEAN-China food relations in this chapter suggests, its breadth of influence and the size of its competitive threat will shape agri-food futures worldwide over the coming decades.

Notes 1 It is important to note, when viewing this data, that considerable trade also takes place via Hong Kong, the traditional entrepôt for China. The importance of these flows is elusive, even though figures for re-exports are available, due to difficulties tracking the origin of imported products in re-exports. Besides, it is impossible to factor in the time lag between arrival and dispatch of products even though this is a minor problem for fresh products that are stored for shorter periods. On top of this there is the illegal trade (smuggling, “grey” trade) which is not recorded. According to official trade data, however, it is clear that since the early 1990s, re-exports of food to ASEAN have fluctuated with no clear trend while significant reductions of re-exports of food to China has taken place. These trends are aggregate results of different patterns of particular product categories. For instance, the value of trade flows for vegetables appear to be reflected fairly accurately in the direct “bilateral” trade figures, whilst mutual exchange in seafood could be somewhat larger than reported due to the complexity of the global seafood trading activities in Hong Kong. Exports of fruit from ASEAN to China, on the other hand, is probably higher than reported by the direct trade figures as a significant portion of exports from Thailand and the Philippines is traded by Hong Kong companies. 2 Extensive land clearings took place in Peninsular Malaysia up to the late 1980s but as idle land became scarce, new and extensive palm oil plantations were established in Sabah and Sarawak albeit within slightly different organisational settings (Fold and Hansen, 2007). 3 This is reflected in the massive imports of crude palm oil into the EU, where bio-diesel production constitutes 90% of the global total (USDA, 2006).

References Antkiewicz, A. and Whalley, J. (2005) “China’s New Regional Trade Agreements”, The World Economy, 27(8): 1255–1274. APCAEM (2007) “Enhancing Export Competitiveness of Asian Fruits”, Asian and Pacific Centre for Agricultural Engineering and Machinery (part of the United Nations Economic and Social Commission for Asia and the Pacific – ESCAP), Bejing. Arias, P., Dankers, C., Liu, P. and Pilkauskas, P. (2003) “The World Banana Economy 1985–2002”, Food and Agricultural Organization, Rome. Caldier, P. (2005) “Thai Tapioca Looking for More Exports”, Food Tech, 9(4): 26–28. Chen, S. (2001) “Recent Situation and Development Trends in Chinese Aquatic Products Trade”, Chinese Agriculture Outlook, 10: 29–36. Cheng, J.Y. (2004) “The ASEAN-China Free Trade Area: Genesis and Implications”, Australian Journal of International Affairs, 58(2): 257–277.

Niels Fold, Jeff Neilson and Bill Pritchard 207 Cross, A. and Tan, H. (2004) “The Impact of China’s WTO Accession on Southeast Asian Foreign Direct Investment: Trends and Prospects”, in The Future of Foreign Investment in Southeast Asia, edited by Nick J. Freeman and Frank L. Bartels, pp. 125–154. London: Routledge Curzon. FAO (2004) “The State of World Fisheries and Aquaculture 2004”, Food and Agricultural Organization, Rome. Available online at http://www.fao.org/sof/sofia/ index_en.htm Fold, N. and Hansen, T.S. (2007) “Oil Palm Expansion in Sarawak: Lessons Learned by a Late-comer?”, in Connell, J. and Waddell, E. (eds) Environment, Development and Change in Rural Asia-Pacific: Between Local and Global, pp. 147–166., London: Routledge. Fold, N. (2000) “Oiling the Palms: Restructuring of Settlement Schemes in Malaysia and the New International Trade Regulations”, World Development, 28(3): 473–486. Fuglie, K.O. (2004) “Challenging Bennet’s Law: The New Economics of Starchy Staples in Asia”, Food Policy, 29: 187–102. Gale, F. (2002) “Will China’s Food Imports Rise?”, The China Business Review, 29(2): 6–10. Gale, F. and Huang, K. (2007) “Demand for Food Quantity and Quality in China”, Economic Research Report Number 32, United States Department of Agriculture (USDA). Greenpeace (2006) “Top Rice Exporters Say No to Genetically Engineered Rice”, 28 November. Available online at http://www.greenpeace.org/international/ news/rice-exporters-say-no-GE-281106. Hasan, M.F., Reed, M.R. and Marchant, M.A. (2001) “Effects of an Export Tax on Competitiveness: The Case of the Indonesian Palm Oil Industry”, Journal of Economic Development, 26(2): 77–90. Hiebert, M. (2005) “China Plays Great Wallflower – Beijing Shuns Leading Role in Trade Talks to Avoid Confrontation”, 6 December, The Wall Street Journal, p. A19. Hoh, R. (2006) “Malaysia – Oilseeds and Products Update (July)”, GAIN Report No. MY6026, USDA Foreign Agricultural Service. Hu, D., Reardon, T., Rozelle, S., Timmer, P. and Wang, H. (2004) “The Emergence of Supermarkets with Chinese Characteristics: Challenges and Opportunities for China’s Agricultural Development”, Development Policy Review, 22(4): 557–586. Huang, J. and Chen. C. (1999) “Effects of Trade Liberalization on Agriculture in China: Commodity Aspects”, CGPRT Center Working Paper No. 43, Centre for Research and Development of Coarse Grains, Pulses, Roots and Tuber Crops, Bogor, Indonesia. Huang, J., Rozelle, S. and Chang, M. (2004) “Tracking Distortions in Agriculture: China and Its Accession to the World Trade Organisation”, The World Bank Economic Review, 18(1): 59–84. Humphrey, J. and Schmitz, H. (2002) “How Does Insertion in Global Value Chains Affect Upgrading in Industrial Clusters?”, Regional Studies, 36(9): 1017–1027. Ji, J. (2007) “Biodiesel Sweeps China in Controversy”, Worldwatch Institute (January 23). Available online at http://www.worldwatch.org/node/4870. Keeratipipatpong, P.A.W. (2005) “Chinese Produce Standards Poised for Improvement: Accord with Thailand will Reassure Consumers”, Bangkok Post, 10 October, p. B4.

208 Being Sandwiched: The Reshaping of ASEAN-China Food Trade Latner, K., O’Kray, C. and Jiang, J. (2006) “China – Bio Fuels. An Alternative Future for Agriculture”, GAIN Report No. CH6049, USDA Foreign Agricultural Service. Li, L. and Huang, J. (2005) “China’s Accession to the WTO and its Implications for the Fishery and Aquaculture Sector”, Aquaculture Economics & Management, 9: 195–215. Ling, K.C. (2005) “China Seeks Boost from Biofuels”, International Herald Tribune, 29 September. Los Angeles Times (2005) “Influx of Garlic Wrinkles Noses in US”, The Los Angeles Times, 14 March. Available online at http://www.tdn.com/articles/2005/03/14/ nation_world/news23.txt Mendoza, M. (2002) “Fresh Garlic Industry Threatened by Chinese Imports”, The Berkeley Daily Planet, 16 January. Available online at www.berkeleydailyplanet.com/article.cfm?archiveDate=01-16-02&storyID=9561 Mohanty, S. (2005) “Pressure on Prices as China Readies First GMO Rice”, Reuters, 3 June. Available online at http://www.gene.ch/genet/2005/Jun/msg00012.html Nguyen, D.L. (2006) “Current Difficulties and Solutions for Enhancing Production and Export of Vietnamese Fruit”, Conference Proceedings, International Seminar on Enhancing Export Competitiveness of Asian Fruits, Bangkok, 18–19 May: 34–46. Available at http://www.unapcaem.org/act_detail.asp?id=324 Orden, D., Cheng, F., Nguyen, H., Grote, U., Thomas, M., Mullen, K. and Sun, D. (2007) “Agricultural Producer Support Estimates for Developing Countries: Measurement Issues and Evidence from India, Indonesia, China, and Vietnam”, IFPRI Research Report No. 152, International Food Policy Research Institute, Washington D.C. Perlez, J. (2006) “The End of Borneo’s Tropical Forests?”, The New York Times, 28 April. Pritchard, B. and Burch, D. (2003) Agri-Food Globalization in Perspective: International Restructuring in the Processing Tomato Industry. Ashgate: Aldershot. Qingzhe, J. (2006) “Palm Oil in the Fried and Snack Food Industries in China”, Paper for the International Palm Oil Trade Fair and Seminar, 21–24 November, Kuala Lumpur; MPOC/PORAM. Ravenhill, J. (2006) “Is China an Economic Threat to Southeast Asia?”, Asian Survey, 46(5): 653–674. Rittgers, C. and Meylinah, S. (2006) Indonesia – Oilseeds and Products Annual 2006. GAIN Report No. ID6002. USDA Foreign Agricultural Service. Roland-Holst, D.R. and Weiss, J. (2004) “ASEAN and China: Export Rivals or Partners in Regional Growth?”, The World Economy, 27(8): 1255–1274. Sally, R. (2005) “Free Trade Agreements and the Prospects for Regional Integration in East Asia”, Asian Economic Policy Review, 1: 306–321. San Francisco Chronicle (2007) “Editorial: The Chinese Garlic Wars”, 4 February, p. E4. Sanchez, J. and Bugang, W. (2006) China – Fresh Deciduous Fruit Annual. GAIN Report No. CH6078. USDA Foreign Agricultural Service. Sanchez, J., Bugang, W. and Li, J. (2006) China – Citrus Annual. GAIN Report No. CH6111. USDA Foreign Agricultural Service. Sriroth, K., Rojanaridpiched, C., Vicharn, V., Suriyaphan, P. and Oates, C.G. (2001) “Present Situation and Future Potential of Cassava in Thailand”, in Howeler, R.H. and Tan, S.L. (eds) Cassava’s Potential in Asia in the 21st Century, pp. 25–46. Bangkok: Centro Internacional de Agricultura Tropical.

Niels Fold, Jeff Neilson and Bill Pritchard 209 Tian, W-M., Yang, Z-H., Xin, X. and Zhou, Z-Y. (2004) China’s Grain Trade: Recent Developments, AARC Working Paper Series No. 38, Asian Agribusiness Research Centre, University of Sydney, Orange. Thai News Agency (2005) Thailand to Barter Rice for Chinese Trains. 12 November. Available online at http://www.barternews.net/china.htm Thai News Service (2005) “Thailand: Thai-Chinese Agreement on Tariff Reduction on Fruits and Vegetables Has Not Generated Much Benefit”, TDRI says, 31 October 2005, electronic news item. Factiva Document THAINS0020051028e1av00066 Tongzon, J.L. (2004) “ASEAN-China Free Trade Area: A Bane or Boon for ASEAN Countries?”, The World Economy, 28(2): 191–210. USDA-ERS (2000) “China’s WTO Accession Would Boost U.S. Agricultural Exports & Farm Income”, Agricultural Outlook, (March), 11–16, US Department of Agriculture, Economic Research Service. USDA (2006) Oilseeds: World Markets and Trade. Circular Series FOP 9-05, September. US Department of Agriculture Foreign Agricultural Service. Vanichanont, P. (2004) “Thai Rice: Sustainable Life for Rice Growers”. Proceedings of the FAO Rice Conference “Rice in Global Markets”, 12–13 February. Rome; FAO. Available online at http://www.fao.org/docrep/008/a0033e/a0033e0g.htm Voice of America (2005) “Thailand’s Bilateral Trade Pacts Face Mixed Reception”, Voice of America Press Releases and Documents, 29 September, electronic news item Factiva Document VOA0000020050929e19t0002x Voituriez, T. (2001) “Palm Oil and the Crisis: A Macro View”, in Gerard, F. and Ruf, F. (eds) Agriculture in Crisis: Commodities and Natural Resources in Indonesia, 1996–2000, pp. 49–71. Richmond; Curzon. Wong, J. and Chan, S. (2003) “China-ASEAN Free Trade Agreement”, Asian Survey, 43(3): 507–526. Xinhua News Agency (2007) “Analysis of China’s Export of Farm Produce in 2006”, 22 January, electronic news item Factiva Document XHBUSW0020070122e31m0000b Zen, Z., Barlow, C. and Gondowarsito, R. (2006) “Oil Palm in Indonesian SocioEconomic Improvement: A Review of Options”, Oil Palm Industry Economic Journal, 6(1), 18–29. Zhou, Z-Y. and Tian, W-M. (2004) “China’s Grain Policy: Retrospect and Prospect”, AARC Working Paper Series No. 36, Asian Agribusiness Research Centre, University of Sydney, Orange.

6 Energy Security and Competition in Asia: Challenges and Prospects for China and Southeast Asia Benjamin K. Sovacool and Vu Minh Khuong

Introduction In some ways, the twentieth century has been all about energy. From 1900 to 2000, engineers and architects built more than 40,000 power plants, at least 3.2 million kilometres of transmission and distribution lines for electricity, 5.1 million kilometres of natural gas pipelines, 300 nuclear waste storage facilities, and more than 600 refineries. The past century saw the world profoundly shaped by the automobile, truck, aircraft, and atomic energy as millions of people shifted from nonmechanised forms of transport and agriculture to reliance on motorised transport and industrial food manufacturing. Electricity, once so novel that it was prized for its “healing powers” and served as spectacle at numerous World’s Fairs, moved from its infancy into the primary fuel for heating homes, powering industrial processes, energising air conditioners (also invented during the century), and enabling the digitaltelecommunications-media-computer-information age. If the twentieth century was about energy, then the twenty-first century could very well be about energy security, especially in Asia. Issues surrounding energy supply and use connect with many of the region’s most pressing public policy problems: possible conflagrations over rapid depletion of fossil fuel reserves, the environmental consequences of climate change, and millions of communities that must endure “energy poverty” without access to consistent sources of lighting, heating, water, mobility, or comfort. These challenges can best be encapsulated by the term “energy security”, meant here to imply the reliable, affordable, efficient, and environmentally responsible access to energy fuels and services. This chapter takes a hard look at energy security in two parts of Asia: China, 210

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the region’s largest energy consumer, and the countries belonging to the Association of Southeast Asian Nations (ASEAN). The chapter begins by sketching five primary energy security challenges faced by both China and ASEAN: potential disruptions in supply, volatile prices, energy poverty, environmental degradation, and energy efficiency. The second part of the chapter explores prospects for regional cooperation between China and ASEAN over energy issues. A better understanding of the energy security dilemmas faced by China and ASEAN is essential, for energy demand in Asia is expected to grow rapidly in the coming years. The International Energy Agency anticipates that global demand for energy will double by 2040, but that more than half of this increase in demand will come from Asian countries (and 45% alone from China). India and China together are forecast to increase their imports of crude oil from 50% today to 80% by 2020. The International Energy Agency also predicts the need to invest more than $13 trillion in energy infrastructure for Asia between now and 2030.1 Moreover, many of the institutions charged with regulating the energy sectors in China and ASEAN tend to lack the capacity and will to respond to energy problems. In China, the energy-related bureaucracy is notorious for being highly fragmented and poorly coordinated. The responsibility for energy pricing, permitting and approval of projects, oversight of state energy companies, and adjustment of electricity rates are spread across many agencies, most of them understaffed and competing with each other.2 All the while, the Chinese economy has grown by a factor of eight from 1980 to today (while the US economy only grew by a factor of two), making China the world’s largest emitter of greenhouse gas emissions and set to be the world’s largest energy consumer by 2010.3 Despite the current economic downturn, the Chinese economy is expected to quadruple in size from 2008 to 2030.4 In the ASEAN countries, the capacity to collect and compile data (and strategise over public energy issues) is comparatively strong in some countries such as Thailand and Singapore but weak in Laos, Cambodia, and Myanmar. This chapter attempts to illuminate the primary energy security challenges at the regional level so that they become more apparent to scholars and policymakers.

Identifying energy security challenges The demand for energy in Asia is predominately driven by two factors, or “twin culprits”. The first is “consumption-led” demand as classes of Asian people achieve increases in luxury and the standard of living, bringing with it more energy-intensive lifestyles that revolve around automobiles,

212 Energy Security and Competition in Asia

air conditioning, and disposable goods. The second is “industrial-led” demand related to economic growth, a structural shift from nonmechanised forms of manufacturing and production to more energyintensive ones, especially for commodities such as iron and steel, cement and glass, paper and pulp, basic chemicals, and non-ferrous metals.5 This rapid growth in demand for energy, in which China has been a driving force, leads to our first two energy security challenges, disruptions in supply and volatile prices. As shown in Table 6.1, in 2006 China accounted for 15.6% of global total primary energy consumption. From 2000 to 2006, China’s total primary energy consumption doubled, while this consumption for the US (the world largest consumer) was nearly unchanged. This pattern was also observed for Chinese consumption of coal, oil, gas, and electricity.

Table 6.1

Selected indicators on China’s energy consumption

Country

Unit

Total Primary Energy*

Quadrillion Btu

China The US Coal

China The US

37.2 99.0

73.8 99.9

15.60% 21.30%

1,282.3 1,084.1

2,584.2 1,112.3

41.20% 16.70%

4,796.0 19,701.1

7,235.0 20,687.4

8.80% 24.10%

902.0 23,333.0

1,993.5 21,653.0

2.38% 20.74%

1,177.9 3,592.4

2,528.9 3,816.8

15.40% 23.30%

Billion cubic feet

China The US Electricity

Global share**

Thousand bpd

China The US Natural Gas

2006

Million tons

China The US Oil

2000

Billion kWh

Note: *Consumption of petroleum, dry natural gas, and coal, and net hydroelectric, nuclear, and geothermal, solar, wind, and wood and waste electricity; Also includes net electricity imports. ** In 2006, except for coal and oil (in 2007). Source: EIA

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213

Such growth is unusual when compared to industrialised countries in Europe and North America. Looking to the future, analysts expect that developing countries in Asia, driven by China and India, will raise their share in global energy consumption from 24% in 2005 to 35% in 2030, while this share for OECD countries will decline from 52% to 41%, respectively.6 Furthermore, it is important to note that, although China’s share in global oil consumption is still much lower than its share in the global total primary energy consumption (8.8% compared to 15.6% in 2006), its rapid growth and increased dependence on imports have added serious volatility to the global oil market. As shown in Figure 6.1, during the period 1988–2008, China’s demand for oil rose nearly four times, from two million barrels of oil per day in 1988 to eight million barrels per day in 2008. In particular, China has turned from a net oil exporter into a net oil importer in 1993 and its oil imports provided 50% of its energy demand in 2008. From 2000 to 2007, crude oil imports roles 132%, while crude oil output domestically over same period grew only 1.6%.7 It is projected that in 2030, China’s demand for oil will be about 15,300 barrels per day which doubles its level of consumption in 2007, and threequarters of this consumption will come from imports.8 Figure 6.1

Chinese consumption, production, and reserves of oil, 1981 to 2008 China Proved reserves

9,000

45

8,000

40

7,000

35

6,000

Import

30

5,000

25

4,000

20

3,000

15

2,000

10

1,000

5

0

0

Source: Data from EIA

Proved Reserves (Billion Barrels)

Oil production

19 8 19 1 82 19 8 19 3 8 19 4 8 19 5 86 19 8 19 7 8 19 8 8 19 9 90 19 9 19 1 9 19 2 9 19 3 94 19 9 19 5 9 19 6 9 19 7 9 19 8 99 20 0 20 0 0 20 1 0 20 2 0 20 3 0 20 4 0 20 5 0 20 6 0 20 7 08

Consumption and Production (Thousand Barrels per Day)

Oil consumption

214 Energy Security and Competition in Asia

Such hefty increases in demand create very serious import dependencies. Historically, during World War II, China’s dependence on oil created grave military concerns. The Japanese effectively blockaded China’s southern coasts, forcing the allies to find other routes to get help from China. From 2003 to 2004, slightly more than ten years after China became a net oil importing country, total energy demand leaped an astonishing 13.8%, outpacing even its growth in GDP at 9.1%. This created severe shortages of oil, forcing the government to call for drastic summer efforts such as dimming street lamps, mandatory energy rationing, and the temporary closure of thousands of factories. The problem was not limited to shortages of oil, but also included lack of fuels such as coal used to produce electricity. While gasoline shortages again prompted massive lines at petrol stations in Guandong province in 2004 and 2004, far more serious were electricity blackouts and brownouts that occurred throughout three-quarters (24 out of 31) of the country’s provinces due to disruptions in the supply of coal.9 China views these continued shortages as very dangerous to its plans for economic growth and social stability, and Chinese policymakers see the need to keep unemployment to socially acceptable levels so that the economy can continue to absorb workers being laid off from state-owned enterprises.10 Demand for energy in Southeast Asia has also grown significantly, although at a slower pace relative to China. Over the period 1990–2005, the consumption of total primary energy in ASEAN countries rose Figure 6.2 Total energy consumption for seven ASEAN countries, 1990 to 2005 by country11 18 16

Quadrillion Btu

14 12 10 8 6 4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Brunei Indonesia Malaysia Philippines Singapore Thailand Viet Nam

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215

nearly 2.5 times, from 6.4 quadrillion British Thermal Units (BTUs) in 1990 to 15.9 quadrillion BTUs in 2005. Among the ASEAN countries, the largest energy consumer is currently Indonesia, followed by Thailand, Malaysia, and Singapore, while Viet Nam was the country with the fastest growth rate in energy consumption over the period (Figure 6.2). These features were also observed for the recent period 2000–2006 as shown in Appendix A. Furthermore, ASEAN countries have also followed the pattern observed for China on the increasing dependence on imports for their oil consumption. The ASEAN-7’s oil consumption rose from less than 1.5 million barrels per day in the late 1980s to more than four billion barrels per day in 2007 (see Figure 6.3). As a group, ASEAN has turned from a net oil exporter to a net oil importer since 1993, nearly at the same year as China. More importantly, the group’s ratio of oil production to proved reserves has shrunk significantly since 2000. In 2007, about 27% of the ASEAN-7 oil consumption was met by imports, the same year Indonesia left the Organisation of Petroleum Exporting Countries because, well, it no longer exported oil. Perhaps surprisingly, the growth of electricity demand in some ASEAN countries has actually outpaced growth in China. Over the period 1985–2005, per capita electric power consumption increased much faster in China and the ASEAN-6 countries than the world average. This consumption level rose by a factor of 1.6 for the world Figure 6.3

ASEAN’s consumption, production, and reserves of oil, 1981 to 2008

Proved Reserves 20

4,000

18

3,500

16 Import

3,000

14 12

2,500 10 2,000 8 1,500

6

1,000

4

500

2

0

0

Proved Reserves (Billion Barrels)

Oil Production

4,500

19 8 19 1 82 19 8 19 3 84 19 8 19 5 8 19 6 8 19 7 8 19 8 8 19 9 9 19 0 9 19 1 9 19 2 9 19 3 9 19 4 9 19 5 9 19 6 9 19 7 9 19 8 99 20 0 20 0 0 20 1 0 20 2 03 20 0 20 4 0 20 5 0 20 6 0 20 7 08

Consumption and Production (Thousand Barrels per Day)

ASEAN-7 Oil Consumption

216 Energy Security and Competition in Asia

average but by a factor of 5.0 in China, 8.1 in Viet Nam, 6.3 in Indonesia, 4.8 in Thailand, 3.7 in Malaysia, 2.4 in Singapore, and 1.7 in the Philippines (see Table 6.2). Table 6.2 also indicates that China and the ASEAN countries (except for Singapore and Malaysia) in 2005 were still far below the world average level of per capita electric energy consumption, which was about one-fifth (19.7%) of the US level in 2000. This implies that the demand for energy in China and ASEAN is expected to continue its spectacular growth in the decades to come. Table 6.2 Level of per capita consumption of electricity for the world average, China and ASEAN-6 countries (US in 2000 = 100) 1985

1995

2005

World

12.0

16.3

19.7

China

2.6

5.6

13.0

0.5 0.6 3.0 6.4 25.2 2.6

1.1 2.0 9.4 14.8 44.4 3.0

4.2 3.7 14.5 23.9 61.2 4.3

ASEAN-6 Viet Nam Indonesia Thailand Malaysia Singapore Philippines

These surges in demand for energy have evoked serious concerns in many countries about energy security and prompted numerous unprecedented decisions. For example, Indonesia has defaulted on energy cargo exports of coal and liquefied natural gas to secure domestic supply and Singapore has placed a moratorium on new gas sales for power plants on energy security grounds.12 Connected in part with disruptions in supply comes volatile (and often escalating) prices for energy fuels and services. While coal and natural gas are traded globally, they are usually exchanged on the basis of long-term contracts, unlike oil, which tends to be sold on the futures market. Nonetheless, coal and natural gas prices for the region have been incredibly unpredictable for the region. The price of coal averaged about $30 per ton in 2003 but jumped to a high of $70 per ton in 2005 before receding to about $45 per ton in 2007. Similarly, the price of natural gas traded on the New York Mercantile Exchange (one of its few global trading points) spiked from $2 per million BTU to $10 after September 11, 2001, surged further upward to $16 in 2006 before dropping to $8 in 2008.13 Crude oil prices have been just as sporadic, as demonstrated by Figure 6.4.

Benjamin K. Sovacool and Vu Minh Khuong Figure 6.4

217

Crude oil prices, 1990–2009 Annual Average Price of Crude Oil

$120.00

$100.00

US$/Barrel

$80.00

$60.00

$40.00

$20.00

$0.00 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Volatility in the price of energy fuels does at least four things. First, it makes such fuels more expensive as traders and suppliers must account for the risk of rapidly falling or rising prices. Second, it makes longterm investment and planning decisions in the infrastructure associated with those fuels difficult. Third, it can increase macroeconomic volatility as gyrations in the price of energy fuels spreads to other commodities. In energy-intensive industries such as food processing, textiles, lumber, paper processing, chemical manufacturing, and cement mixing, for example, the costs of fuel account for more than 15% of the final cost of the goods they produce. In some Southeast Asian countries, that tend to rely more on “traditional” fuels such as biomass and wood, price fluctuations tend to hurt poorest families the most. One study looking at the effects of increases in the price fuels in four developing Asian economies from 2002 to 2005 found that poorer households paid 171% more of their income for cooking fuels and 120% more for transportation, 67% more for electricity and 33% more for fertilisers when compared to the expenditures on energy from middle and upper class households.14 Fourth (and perhaps ironically), volatility can discourage investments in alternatives to those fuel sources. It creates uncertainty for big firms and investors over whether investments in alternatives such as renewable power technologies, bio-fuels, and energy efficiency will be profitable.15

218 Energy Security and Competition in Asia

A third energy security challenge is related to what the United Nations and World Bank call “energy poverty”. Worldwide, nearly 2.4 billion people use traditional biomass fuels for cooking and heating, and 1.6 billion (more than 10% of the global population) do not have access to electricity.16 By 2030 about 1.4 billion will still be at risk of having to live without modern energy services even if the trillions of dollars of investments in energy infrastructure predicted by the International Energy Agency occur. More than half the population in Southeast Asian countries such as Cambodia, Laos, and Myanmar relies on traditional fuels for their primary energy supply. Without modern energy carriers, women and children are typically forced to spend significant amounts of time searching for firewood, and then combusting wood and charcoal indoors to heat their home or prepare meals. Such fuels are typically combusted indoors in simple household cooking stoves – such as a pit, three pieces of brick, or a U-shaped construction made from mud – and, because they are not vented with flues or hoods, burn fuel inefficiently and concentrate pollution within the premises. Such stoves are used for several hours each day at times when people are present indoors, resulting in serious public heath, environmental, and economic repercussions. The health consequences of relying on traditional fuels and indoor combustion are monumental: indoor air pollution kills in the order of 2.8 million people every year, almost at par with the number dying annually from HIV/AIDS. The availability of cooking fuels is also linked to hunger, as the poorest families must devote a higher share of their income to purchase fuel, leaving less money for actual food, and making them vulnerable to sudden changes in fuel prices. These families also spend significant amounts of time searching for fuel-wood – about 40 hours per month in a typical developing country – leaving many women and children overexerted and underfed. In addition to searching for wood, charcoal, or dung (the three largest sources of traditional energy in the developing world), women and girls often spend more than two hours per day fetching water, which they then carry from the water source to a higher elevation, causing additional physical strain. A fourth and final energy security challenge concerns environmental degradation. Perhaps the most significant aspect here is climate change, and the largest contributor to regional greenhouse gas emissions is coal combustion. For China, coal combustion provided 65% of national electricity in 1985 but ballooned to about 80% in 2006. From 2002 to 2007, demand for electricity in China grew by about 12% per annum and more than 70,000 MW of capacity were bought online to meet it.

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219

A majority of this capacity was coal-fired, and China is currently constructing the equivalent of two 500 MW coal-fired plants per week, or a capacity comparable to the entire power grid in the United Kingdom every year.17 Every week to ten days for the past three years, in other words, a coal-fired power plant opens somewhere in China big enough to serve all of the households in Dallas or San Diego. Coal also provides 60% of Chinese chemical feed-stocks, 55% of industrial fuel, and about 45% of China’s national railway capacity is devoted to the transport of coal. Coal is therefore China’s most abundant and widely used fuel, and China is the world’s largest coal producer (mining about 2.3 billion tons per year compared to just 1.1 billion tons in the United States). Put another way, coal production and consumption account for more than 65% of China’s total energy production and consumption.18 China already uses more coal than the European Union, Japan, and United States combined. The associated greenhouse gas emissions from this coal use are monumental. The Chinese coal-fired power plants added in the past five years and resultant increases in greenhouse gas emissions will already offset all of the gains made by the Kyoto Protocol and collective voluntary efforts around the world (see Figure 6.5).19

Figure 6.5 Chinese energy-related carbon dioxide emissions, 2005–2030 (million metric tons) 9,000 8,000 7,000 6,000 5,000

Coal Oil

4,000

Natural Gas 3,000 2,000 1,000 0 2005 Source: Garrison, 2009, p. 17.

2015

2030

220 Energy Security and Competition in Asia

In Southeast Asia, the International Energy Agency reports that coal consumption has grown faster than any other energy source. While total energy consumption as a whole grew by 4.2% from 1995 to 2006, Figure 6.6 shows that coal markets grew by 10.5% (whereas natural gas grew by only 7.5% and oil 5.5%). Looking to the future, the International Energy Agency expects coal use to grow from about 56 million tons of oil equivalent in 2005 to 162 million tons by 2020 and 298 by 2030, a fivefold increase in 25 years.20 Figure 6.6 Total energy consumption for seven ASEAN countries, 1995–2006 (million tons of oil equivalent, by fuel source)21

250

200

150

100

50

0 1995

1996

1997

1998

Other

1999

2000

Electricity

2001

Gas

2002

Oil

2003

2004

2005

2006

Coal

Source: International Energy Agency.

From an environmental perspective, however, coal is the absolutely worst fuel to use, for it brings with it not only a rapidly changing climate but also pollution, soot, and toxic chemicals. Environmentally, every single kilowatt-hour (kWh) from coal use produces about 19 cents worth of damage (see Figure 6.7). The amount may not seem like much, but put into context of Chinese and ASEAN coal electricity generation the numbers become mind-numbing. Given that China produces about 1,713,000 GWh of electricity from coal each year, and ASEAN countries an additional 651,280 GWh, and the environmental damages from coal use exceeded $325 billion for China and $123 billion for ASEAN.

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Figure 6.7 Environmental damages from various electricity sources (in US cents/kWh) 20 18 16 14 12 10 8 6 4 2

l oa C

il O

ar N

uc

le

as om

ur N

at

s

s al

ec el ro yd

Bi

tri

ga

c

r la So H

G

eo

th

er

W

m

in

al

d

0

Source: Benjamin K. Sovacool, “Renewable Energy: Economically Sound, Politically Difficult”, Electricity Journal, 21(5) (June, 2008), pp. 18–29.

These damages are already quite apparent in many parts of the region. The sulfur dioxide emissions associated by coal combustion in China cause an estimated 400,000 premature deaths each year. Acid rain that poisons lakes, rivers, forests, and crops is prevalent in Malaysia and Indonesia. A few other facts are startling: only 1% of China’s 560 million city dwellers breathe air considered safe by the European Union; 297 of the largest 300 Chinese cities do not meet the minimal environmental standards for ambient air pollution set by the United States; and the World Bank estimates that the economic burden of premature mortality associated with air pollution was greater than 1.16% of GDP in 2007.22 The doubling of Chinese coal use during the period of Den Ziaoping wrought massive air pollution problems in addition to climate-endangering greenhouse gas emissions, so much that coal is responsible for 70% of dust and smoke in the air and 90% of sulfur dioxide emissions. Ambient air quality is so low in China that twothirds of its largest cities have concentrations of pollutants two to six times higher than recommendations by the World Health Organisation, and by 2020 if trends continue China will be paying $390 billion per

222 Energy Security and Competition in Asia

year (a sobering 14% of its GDP) to treat diseases caused by coal-related pollution.23 Despite these problems, less than 15% of Chinese coalfired power plants have air pollution controls for sulfur dioxide installed.24 Fifth, while China and the ASEAN countries have certainly experienced substantial growth in demand for energy, they have tended to meet that demand inefficiently. One of the central aspects of any attempt to improve energy security is to adhere to best practices in improving efficiency in energy use and reducing the energy intensity of economic growth. As shown in Figure 6.7, however, there are large variations among developing Asian countries in both energy efficiency (measured as the relative loss rate of electric power in transmission and distribution as percentage of output) and electric power intensity in economic growth (measured as the relative electric power growth corresponding to each percentage of GDP growth, controlling for the country income level). Figure 6.8 indicates that over the period 2000–2005, only Singapore performed better the world average (which is standardised to 1.0) in each dimension, meaning that the remaining

BETTER

Electric Power Intensity in GDP Growth

WORSE

Figure 6.8 Variations among developing Asian countries on energy efficiency and intensity

5-year period, 2000–2005 Viet Nam

S. Korea

China

Pakistan

Bangladesh Sri Lanka Malaysia

1

Thailand Nepal

Singapore

India Indonesia Philippines Hong Kong

0

BETTER

1 Electric Power Loss

WORSE

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223

countries are less efficient than most in converting energy fuels into useful goods and services. The problem of declining efficiency appears most serious for India, Pakistan, and Viet Nam, which suggests that these countries urgently need to revise their energy policies to make economic growth less energy-intensive. As a final complicating factor, efforts to respond to the four energy security challenges identified above – disruption in supply, volatility, poverty, and environmental stewardship – can conflict directly with each other. The most effective strategy to address the energy poverty is to expand access to modern forms of energy such as electricity networks. Building and operating these networks, however, is expensive (hurting affordability and volatility) and damaging to the environment (hurting stewardship). One way for ASEAN and China to minimise disruptions in supply would be to rapidly extract domestic reserves such as natural gas, oil, and coal, but this would increase greenhouse gas emissions (hurting stewardship) and raise energy prices (exacerbating poverty).

Prospects for regional cooperation and competition These inherent energy security challenges give rise to both cooperation and competition. There is some indication that the energy security challenges facing the region could encourage regional cooperation. China, for example, sees Southeast Asia as contributing to its energy security by offering coal and natural gas exports. Chinese policymakers have been toying with the idea of building pipelines from Myanmar and Thailand to end up in Yunnan, meaning that oil tankers need to only unload in Burmese and Thai ports without having to traverse regional straits. China is also offering ten offshore oil and gas blocks to developing nations and explicitly solicited calls from Southeast Asian countries.25 Talk of regionalism is equally buoyant in Southeast Asia. ASEAN itself has announced plans for an integrated network of electricity transmission and distribution lines (the “ASEAN Power Grid”) and a separate interconnected network of natural gas pipelines (the “Trans-ASEAN Gas Pipeline”). Regional cooperation in the form of interstate electricity distribution occurs in the Greater Mekong Subregion between Thailand, Laos, Cambodia, China, and Viet Nam, and bilateral trading of natural gas occurs via pipelines between Indonesia, Malaysia, Singapore, and Thailand.

224 Energy Security and Competition in Asia

However, while some momentum exists towards continued cooperation, many factors are pushing the region towards competition. First, rising demand for energy has given rise to “energy protectionism” and claims about “energy sovereignty”. China and many countries within ASEAN want energy “cooperation” to increase imports and secure energy supplies, but not the sort of “cooperation” that leads to increased exports. Chinese policymakers, for example, have primarily viewed energy security as an ability to rapidly adjust to their new dependence on global markets and engage in energy diplomacy, shifting from their former commitments to self-reliance and sufficiency (“zili gengsheng”) to a new desire to build a well-off society (“Xiaokang Shehui”). Buying stakes in foreign oil fields, militarily protecting vulnerable shipping lanes, and an all-out “energy scramble” for resources are key features of China’s current approach to energy security.26 Not, in other words, “reaching out” to help other countries improve their respective energy. In Southeast Asia, some countries seem equally preoccupied on placing domestic energy security concerns well above regional ones, even if they tradeoff with each other. Recent shortages of natural gas in Indonesia, for example, have already forced at least two natural gas power plants to prematurely shutdown or operate at partial capacity.27 As a result Indonesian policymakers responded by nationalising some of their oil and gas fields (that had previously belonged to transnational oil corporations) and cut off exports. These actions arguably only “increased” Indonesian energy security by degrading regional energy security. At times these concerns have spilled over into active disputes. Brunei, China, Indonesia, Malaysia, the Philippines, Taiwan, Thailand, and Viet Nam continue to contest each other’s claims to the oil and natural gas reserves found in East Natuna and the Spratley Islands.28 China even ambitiously claims a few natural gas fields in Indonesian waters more than 1,000 kilometres away from their existing territory, and Chinese officials have repeatedly iterated that their sovereignty claims to the oil and gas resources in the South China Sea are “indisputable”. The Chinese, at least, appear willing to backup their rhetoric with military action. When the South Vietnamese government announced in 1974 that they intended to develop some of the oil fields in their part of the Gulf of Tonkin, the Chinese military responded by forcefully seizing three of the islands with the largest amount of oil reserves. While no blood was shed then, in 1988 China occupied another dis-

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puted area in the South China Sea and the Vietnamese navy responded. A three-day military clash near Johnson Reef ensued, leaving 70 sailors dead and two gunboats destroyed.29 In 1992 China formally stated its right to the “use of force” to protect its claims to these resources and three years later seized a parcel of land belonging to the Philippines to “procure” the oil and gas reserves around it (although it has been more conciliatory since then). In the “Kikeh oil dispute”, competing efforts between Brunei and Malaysia to sign contracts with oil companies deteriorated into a tense naval standoff in April and May 2003. In 2007 demonstrations in Viet Nam over China’s attempts to claim the Spratly Islands in the South China Sea convinced Chinese national oil and gas companies to withdraw from the region. China also retaliated by pressuring ExxonMobil out of an oil exploration deal with Viet Nam in July 2008 that it saw as a “breach of sovereignty”, and in May 2008 convinced British Petroleum to halt plans to explore for oil and gas off the Vietnamese coast to prevent “territorial tensions”.30 The predominant factor fueling these contests of sovereignty is deep tension and suspicious within ASEAN members and between ASEAN and China. One study conducted by one of the authors, after interviewing stakeholders connected with ASEAN’s plans for natural gas pipelines, noted that throughout the course of research interviews: The author was told … that the Indonesians are afraid that Singapore is trying to “buy up” the country’s telecommunications firms and natural resources; the Singaporeans are wary of Malay corruption in large infrastructure projects; the Malays are worried about importing natural gas from the Gulf of Thailand; the Thais are concerned about the human rights abuses allegedly occurring near Burmese gas pipelines; and “everyone” has reservations about fully engaging China and Japan. One official stated that as a collective whole, ASEAN countries feel that they got taken advantage of by the western banks and investors during the Asian Financial Crisis, and are thus still “afraid they are going to get screwed at everything, and that everyone is out to take advantage of them – even each other.” Suspicion … appears to be deeply entrenched.31 The rise of China and its surge in energy consumption and imports has repercussions here for the ASEAN countries, which are mistrustful of just about everything and in essence “compete” for the same limited resources.

226 Energy Security and Competition in Asia

Conclusion What are readers to make of the energy security challenges faced by China and the ASEAN countries? We offer two preliminary conclusions. First, as energy consumption in the region grows, so will the starkness of energy security issues. If demand for energy expands by 2040, as expected, then the social, environmental, and political costs of energy expand with it. For China, this could mean a doubling of noxious pollutants associated with manufacturing and electricity generation, its reliance on foreign suppliers of oil, and the risks involved with volatility and power outages. For Southeast Asia, a doubling of energy consumption could mean a significant increase in political tensions between ASEAN members, greater shortfalls of natural gas and coal needed to satiate domestic needs, and competition with China (and other large consumers) over scarce natural resources. Making matters worse, many dimensions of energy security for these countries, such as security of supply and fighting poverty, tradeoff with each other. Second, while predicting the future is always impossible, the prospects in the region seem tilted more towards competition than cooperation. China and ASEAN countries talk about “regionalism” and “cooperation” on energy issues, but this talk seems designed only to mask opportunistic and protectionist thinking. The Chinese remain dedicated to procuring energy supply from as many sources as possible, and Southeast Asian leaders remain suspicious of each other and distrustful of Chinese plans for expansion, especially in areas of the region where sovereignty claims are actively contested. These varying factors remind us that energy production and use can become highly politicised and strategically important elements of national security. If there is a single lesson from the energy security challenges facing China and Southeast Asia, it is that energy involves interests, priorities, and dimensions beyond the energy sector. These issues intersect with the conditions that can shape poverty and economic growth, the relationship China has with its Southeast Asian neighbours and vice versa, and complex visions of what each country hopes to become in the decades ahead. Energy is therefore a useful lens to continue to explore the unfolding political, economic, and social dynamics at work within Asia.

Benjamin K. Sovacool and Vu Minh Khuong

Appendix A Country Total Primary Energy

Energy consumption for the ASEAN-7 countries Unit

Brunei Indonesia Malaysia Philippines Singapore Thailand Viet Nam ASEAN-7 Note: * In 2006 Source: EIA

ASEAN Share*

0.1 4.1 1.9 1.3 1.5 2.6 0.8 12.3

0.2 4.1 2.6 1.3 2.1 3.7 1.4 15.4

2.0 1.0 1.4 1.0 1.4 1.4 1.8 1.3

1.3 26.6 16.9 8.4 13.6 24.0 9.1 100.0

0 22.5 3.6 9.6 0 24.2 8.6 68.5

0 24.1 16.9 11.1 0 33.2 17.3 102.6

– 1.1 4.7 1.2 – 1.4 2.0 1.5

0 23.5 16.5 10.8 0 32.4 16.9 100.0

12.0 1,037.0 465.0 353.0 660.0 725.0 176.0 3,432.0

15.0 1,208.0 520.0 318.0 857.0 941.0 255.0 4,118.0

1.3 1.2 1.1 0.9 1.3 1.3 1.4 1.2

0.4 29.3 12.6 7.7 20.8 22.9 6.2 100.0

38.8 1,081.3 721.8 0.4 53.0 704.5 40.6 2,640.4

140.9 801.7 1,136.4 77.7 233.4 1,176.0 201.3 3,767.4

3.6 0.7 1.6 194.3 4.4 1.7 5.0 1.4

3.7 21.3 30.2 2.1 6.2 31.2 5.3 100.0

2.4 77.6 60.0 36.7 27.4 83.1 22.0 309.6

2.9 110.7 96.0 47.0 35.1 123.9 48.1 464.9

1.2 1.4 1.6 1.3 1.3 1.5 2.2 1.5

0.6 23.8 20.6 10.1 7.6 26.7 10.3 100.0

Billion Cubic Feet

Brunei Indonesia Malaysia Philippines Singapore Thailand Viet Nam ASEAN-7 Electricity

2006/2000

Thousand bpd

Brunei Indonesia Malaysia Philippines Singapore Thailand Viet Nam ASEAN-7 Natural Gas

2006

Million Tons

Brunei Indonesia Malaysia Philippines Singapore Thailand Viet Nam ASEAN-7 Oil

2000

Quadrillion Btu

Brunei Indonesia Malaysia Philippines Singapore Thailand Viet Nam ASEAN-7 Coal

227

Billion kWh

228 Energy Security and Competition in Asia

Notes 1 International Energy Agency, World Energy Outlook 2008 (Paris: IEA, 2009). 2 James Katzer et al., The Future of Coal: Options for a Carbon-Constrained World (Cambridge, MA: An Interdisciplinary MIT Study, 2007). 3 Wenran Jiang, “China’s Energy/Resource Needs & Its Impact”, Seminar on Sustainable Development and Energy Security (Institute of Southeast Asian Studies, Singapore, April 22 and 23, 2008). 4 Garrison, Jean A. (2009) “China’s Quest for Energy Security: Political, Economic, and Security Implications”. Paper Presented to the 50th Annual Meeting of the International Studies Association, New York, February 15–18, 2009, p. 3. 5 Daniel H. Rosen and Trevor Houser, China Energy: A Guide to the Perplexed (Washington, DC: Center for Strategic and International Studies, May, 2007). 6 Energy Information Administration (EIA), International Energy Outlook 2008, DOE/EIA-0484 (2008), Table 1. 7 Chen Gang, “Energy Efficiency: High Politics in China”, Presentation at the Conference on Energy Efficiency (Singapore, March 27–28, 2008). 8 International Energy Agency (IEA), World Energy Outlook 2004, OECD/IEA 2004, Tables 3.1 (p. 82) and 3.7 (p. 117). 9 Bay Fang, “China’s Renewal: Hungry for Fuel, It Emerges as a Leader in Alternative Energy”, U.S. News & World Report (June 12, 2006), pp. 61–64. 10 Tai Wei Lim, “Chinese Oil Diplomacy”, Paper Presented at the 2005 Hawaii International Conference on Arts and Humanities, January 13–26, 2005, pp. 1–22. 11 The three ASEAN countries excluded due to unreliable data were Cambodia, Laos, and Myanmar. 12 Benjamin K. Sovacool, “Energy Policy and Cooperation in Southeast Asia: The History, Challenges, and Implications of the Trans-ASEAN Gas Pipeline Network (TAGP)”, Energy Policy, 37(6) (June, 2009), pp. 2356–2367. 13 Benjamin K. Sovacool, “The Benefits of Solar Energy for Singapore and Southeast Asia”, Presentation to SEMICON and SOLARCON Singapore, May 22, 2009, p. 20. 14 United Nations Economic and Social Commission for Asia and the Pacific [UNESCAP], 2008. Energy Security and Sustainable Development in Asia and the Pacific (Geneva: UNESCAP, April, ST/ESCAP/2494). 15 “The Outlook for the Oil Price: Bust and Boom”, The Economist 391(8632) (May 23, 2009), pp. 65–66. 16 Modi, Vijay, Susan McDade, Dominique Lallement, and Jamal Saghir (2005) Energy Services for the Millennium Development Goals (Geneva: United Nations Development Program, World Bank, and Energy Sector Management Assistance Program). 17 James Katzer et al., The Future of Coal: Options for a Carbon-Constrained World (Cambridge, MA: An Interdisciplinary MIT Study, 2007). 18 J. Fan, W. Sun and D.M. Ren, “Renewables Portfolio Standard and Regional Energy Structure Optimization in China”, Energy Policy, 33 (2005), pp. 279–287. 19 Keith Bradsher and David Barboza, “Pollution from Chinese Coal Casts a Global Shadow”, The New York Times, June 11, 2006, p. 14.

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20 Shigeru Kimura, “Energy Efficiency and Conservation in Southeast Asia”, Presentation to the IEA/ERIA/EMA Joint Workshop, March 26–27, 2009, Singapore. 21 The three ASEAN countries excluded due to unreliable data were Cambodia, Laos, and Myanmar. 22 Chen Gang, “Energy Efficiency: High Politics in China”, Presentation at the Conference on Energy Efficiency (Singapore, March 27–28, 2008). 23 Jiaping Wu, Stephen T. Garnett and Tony Barnes, “Beyond an Energy Deal: Impacts of the Sino-Australia Uranium Agreement”, Energy Policy, 36 (2008), pp. 413–422. 24 Garrison (2009). 25 Tai Wei Lim, “ASEAN’s Role and its Management of the Sino-Japanese Rivalry”, Stanford Journal of East Asian Affairs, 5(1) (Winter, 2005), pp. 133–144; Tai Wei Lim, “A Political-Economic Survey of Japan-China Activities in Southeast Asia: Rivalry and Possible Collaboration”, Paper Presented to the Japan China Economic Association, February 9, 2006, pp. 1–24. 26 For explorations of the Chinese energy security strategy, see Margret J. Kim and Robert E. Jones, “China’s Energy Security and the Climate Change Conundrum”, National Resources & Environment, 19 (2004–2005), pp. 3–8; Joseph Y.S. Cheng, “A Chinese View of China’s Energy Security”, Journal of Contemporary China, 17(55) (May, 2008), pp. 297–317; Shebonti Ray Dadwal, “China’s Search for Energy Security: Emerging Dilemmas”, Strategic Analysis 31(6) (November, 2007), pp. 889–914; and Xu Yi-chong, “China’s Energy Security”, Australian Journal of International Affairs, 60(2) (June, 2006), pp. 265–286. 27 Sovacool, Ibid. 28 Cossa, Ralph A. and Khanna, Jane (1997) “East Asia: Economic Interdependence and Regional Security”, International Affairs, 73(2). 29 Richard P. Cronin, China, Vietnam, and the Rich Resources of the Gulf of Tonkin (Stimson Center Asian Political Economy Program, January 29, 2008). 30 John Ruwitch, “RPT-China and Vietnam Face Strains as War Memory Fades”, Reuters News Service, February 15, 2009. 31 Sovacool (2009) “Energy Policy and Cooperation in Southeast Asia”.

7 The Impact of China on the Electrical and Electronics Industry in Southeast Asia Frank Ben Tipton

Introduction Technology, and especially high technology, has an almost mystical value in the contemporary world. Developing nations place great hopes in high-tech industries, both as sources of growth and as markers of successful entry into the ranks of advanced economies. The electrical and electronics industry is one such, but the picture is problematic. China and the countries of Southeast Asia are emerging economies. They compete for foreign investment, and multinational firms are adroit in the exploitation of the resulting “tournaments” among would-be host countries. Domestic firms face daunting competition from the major established firms from the United States, Europe, and Japan, and from second-tier firms from Taiwan and South Korea. Further, in the high technology area the role of the individual entrepreneur has been crucial over the past generation, but in both China and Southeast Asia the possibilities for entrepreneurial activity are severely restricted by political and social structures. China has the advantage of size, but in the longer run its future depends not only on the progress of technology, but also on ongoing reforms in legal systems, corporate governance, and possibly broader national cultural traits. This chapter is organised as follows. The first section of the chapter presents an overview of the various segments of the electrical and electronics industry, and considers the contentious issue of the origins of technological change. It argues that genuinely new technologies have tended to arise from independent entrepreneurial activity. In the following section, I analyse the relationship between the electrical and electronics industries in China and the countries of Southeast Asia to the global market. Subsequently, the chapter outlines national and 230

Frank Ben Tipton 231

multilateral policies that governments hope will support these key industries while also addressing the difficulties confronting independent entrepreneurs in both China and Southeast Asia, and the drag this places on development in general but particularly in high technology industries. In the final sections of the chapter, I present three case studies that illustrate the successes and the problems confronting electrical and electronics firms in both China and Southeast Asia. The success of Malaysian Sapura Group demonstrates both the high level of capabilities developed by indigenous Southeast Asian firms and the ongoing difficulties of management, scale, and focus. Similarly the even more spectacular success of China’s Haier Group shows the advantages of scale available in the Chinese market, but again the difficulties of achieving true global competitiveness. Flextronics, headquartered in Singapore, is primarily American, and its concentrated focus on its role as a producer and service provider to other firms, its technical competence, and its ability to shift from one country and region to another, suggests the directions in which this inherently global industry will develop. The chapter concludes by looking at alternate paths for the industry in China and Southeast Asia, including an assessment of the prospects for greater collaboration, in light of China’s rise.

The electrical and electronics industries The electrical and electronics industry includes a diverse range of products and an equally diverse range of firms. Computers spring first to mind, and these can range from individually built supercomputers, through more or less customised servers, to standard business-oriented desktop machines, to laptops and microcomputers for both business and personal use. However, products also include large capital equipment items, and these in turn can range from fairly standard power generation and distribution equipment, through switching and PABX installations, to individually designed high capacity router devices. They also include consumer electrical appliances, some of which are standard commodities and others that include computerised or internet-enabled elements. And they include consumer electronics items, mobile phones, personal digital assistants, portable recorders and players, cameras, and devices that combine two or more of these functions, all of which may be connected to the internet as well. Every product in turn consists of a variety of components. The cabinet, motor, housing, and controls of a dishwasher, or the housing, screen, drives, motherboard, and processors of a laptop computer are

232 The Impact of China on the Electrical and Electronics Industry in Southeast Asia

all separate products than can and frequently are produced by separate companies located in separate countries. Some of the technologies are convergent, as in the widespread use of infrared controls, and some are parallel, as with small motors activated by those controls. Huge multinational corporations dominate the world landscape, some such as Matsushita spanning several or all of these areas, and others such as Nokia concentrating on one particular type of product. In addition there are second-tier firms that play important roles internationally, such as Anam Industrial of South Korea and Siliconware Precision Industries of Taiwan, respectively the world’s second and third largest independent packagers of integrated circuits. And there are further firms, ranging from very large to very small, that provide products and services to the large firms. Much of the industry consists of firms known as “original equipment manufacturers” (OEM) that produce goods to order that are then sold under the brand names of the contractors. Some have taken a step up and become “original design manufacturers” (ODM), who design new products to the general specifications laid down by their customers, again to be sold under the contractors’ brand names. OEM and ODM manufacturers frequently provide components for inclusion in finished products, and again these may range from standard commodities to highly specialised and even unique objects. The main driver of change in the industry is the increasing incomes of consumers and continued heavy investment in telecommunications in the United States, Europe, and Japan (Tipton, 2002). The rising numbers of affluent people in the urban centres of developing countries, including the capital regions of Southeast Asia and the urban centres of China adds a further impetus, with the ongoing upswing in take-up of domestic appliances, consumer electronics devices, and internet-related technologies. China now is reported to have more internet users than the United States, for instance (Internet World Stats), and more users of mobile phones (Nation Master). This demand impacts directly on firms producing those goods. In turn this affects the other firms that supply the primary firms’ needs. Computers can now be applied to all stages in every firm’s supply chain, and once in place these systems require both expansion and upgrading. Both consumers and producers require increasing amounts of electrical power, including large amounts for data storage, and this demand in turn impacts on the firms producing powergenerating and distribution equipment. A second driver of change is technology, but the forces driving technology are objects of contention among specialist scholars. Where

Frank Ben Tipton 233

technologies are convergent or parallel, many argue that large firms have an advantage because they can develop large numbers of new products simultaneously and use their established brand image and marketing channels to push new products onto the market. These advantages of both “scale” and “scope” may seem insurmountable, and some observers wonder whether Chinese or Southeast Asian firms will ever be able to compete in the global marketplace. Peter Nolan and his colleagues, in their encyclopedic study of large-scale enterprise in China, argue that all industries tend towards oligopoly. Large firms force intense competition and price cutting, driving out weaker competitors. They then reinforce their position through their ability to invest in research and development, leading to further improvement in the quality of their products and even lower costs of production. Eventually every industry comes to consist of only the few huge firms with sufficient economies of scale and scope to complete (Nolan et al., 2001: ch. 1). Scale and scope may give an overwhelming advantage to the “first movers”, the established major firms in Europe, the United States, and Japan. Access to global supply chains and the massive resources they can devote to research and development protect them from less wellendowed competitors. Major firms may, as Nolan says, “become more and more Asian, as East Asia’s share of the global market … steadily rises”, but their Asian branches will remain dependent on decisions taken by their headquarters (Nolan et al., 2001: 65). Studies of the international supply chains of the “big buyers” such as Walmart also suggest that Asian firms may be confined to niche roles in the global sourcing strategies of huge multinational firms (Gareffi, 1993). Nevertheless, despite the weight of the large established forms, some of the most important innovations in the electrical and electronics industries have come from new firms, pursuing an emerging market or developing a new product. Two important Asian examples are Acer and Creative Technology. Acer, one of the world’s largest producers of personal computers, began as a small firm in a government-sponsored technology park in Taiwan, acting as an agent for United States microprocessor firms and providing services to Taiwanese manufacturers of electronic games. Acer’s founder Stan Shih saw an opportunity to become a low-cost producer of IBM-compatible computers, as an OEM producer working for larger firms that would sell the machines under their own brand names. Building on the expertise acquired, Acer moved to establish its own brand and a distinctive business model. Shih is famous for his four-character “circle of dragons with no head”. The

234 The Impact of China on the Electrical and Electronics Industry in Southeast Asia

phrase epitomises Acer’s structure of autonomous business cells, in which none of the group’s member firms exercises direct supervisory authority over the others. Each member firm supplies products and services to other members of the group as well as to external customers, but no member is bound to source its needs exclusively from other group members. Ongoing collaboration, a developing history of quality products and services, and ultimately the trust that this creates, are the basis for the group’s coherence (Acer; Shih, 2001; Mathews, 2002). Sim Wong Ho, Singapore’s most famous high-tech entrepreneur, was the tenth of 12 children, an undistinguished student with a diploma in engineering from Ngee An Technical College. He worked for a Japanese firm, moved to California for a time, and set up Creative Technology in 1981 in a Singapore shopping centre with childhood friend Ng Kai Wa. They failed in their attempt to create a multimedia computer, but as they were experimenting they hit upon the prototype of the integrated soundcards that led to success. The Sound Blaster stereo soundcard for PC computers became the de facto international standard. Ongoing development has maintained Creative’s position in its soundcard niche, and the firm has expanded into a range of consumer electronics items. Overseas subsidiaries and acquisitions provide access to emerging technologies. Creative Labs were formed in the United States in 1988, in Europe in 1993, and in Asia in 1999, and for example Creative purchased 3D Labs in the United Kingdom in 2002 to gain access to the professional graphics market (Creative Technology; Seno, 2000; Yeung, 1999, 2002). Two examples will not refute the oligopoly argument, of course, but there are three general points that relate particularly to the ambitions of Asian countries in the high-tech area. First, in the very important case of the semiconductor industry, John Mathews and Dong-Sung Cho (2000) argue that Asian firms have been able to begin silicon wafer fabrication at the cutting edge of the technology, and to maintain their position. Second, parallel to the examples of Acer and Creative, economists such as Barry Eichengreen argue forcefully that the current period of “intensive” technology-dependent growth requires institutional support, in the form of ease of establishing new businesses, minimal intervention in firm management, and ready access to capital. Eichengreen compares Europe unfavourably to the United States in this regard, and as seen below his strictures apply with even more force to China and Southeast Asia (Eichengreen, 2007, chs 12–13). Third, large firms are inevitably bureaucratic in nature. The economies of scale and scope may be directed more towards incremental improvements in

Frank Ben Tipton 235

existing products to boost present sales rather than towards the search for breakthrough technologies with longer-term potential. Looking at Asia from this perspective, in China the largest firms are state-owned enterprises, and in Southeast Asia the largest firms are familycontrolled groups. Both types tend to be tall structures with a topdown managerial style, not notably well suited to innovative activity, but again as seen below they are the ones favoured by the current institutional environment (Morck et al., 2008; Tipton, 2007).

The electrical and electronics industries of China and Southeast Asia in the global marketplace Applying this framework to China and Southeast Asia, indigenous firms confront both opportunities and threats. The opportunities arise from growing markets, in both developed and developing countries. The threats arise from competition, and from the tendency for new products to become commodified, differentiated only by price and brand image. Access to the new technologies is crucial, but so too is finance, and the ability to secure or develop capabilities within the firm that permit operations to achieve acceptable international standards. Because of its spread and because of these linkages, the fortunes of the electrical and electronics industries are therefore tied to changes elsewhere, for instance power generation and the competition for energy resources, global and regional capital markets, and educational systems. Beginning with capital equipment, at present China has a large sector, and some large firms such as Huawei Technologies that have expanded internationally (Burrows and Einhorn, 2003; Sainsbury, 2004). No indigenous firm in Southeast Asia equals Huawei in size, although there are firms such as Shin Corp in Thailand, Singapore Technologies Group (STG), or the manufacturing divisions of Viet Nam Post and Telegraph (VNPT) with high-level technical capabilities. The first case study offered below, Malaysia’s Sapura Group, fits into this category. In consumer electrical appliances, China again has a large sector and very large firms with substantial exports such as Haier, the focus of the second case study below. In Southeast Asia most domestic appliance production is original equipment manufacture (OEM), with local firms producing items under contract to foreign firms, for regional consumption. In consumer electronics, China has large domestic firms with substantial exports. Lenovo, the company that bought IBM’s former

236 The Impact of China on the Electrical and Electronics Industry in Southeast Asia

personal computer division, now has a substantial international presence, but the reason IBM wanted to divest itself of this division was precisely because personal computers have become commodified and only profitable to those firms that can cut costs to the absolute minimum. China has also become the home of subsidiaries of large foreign firms such as Motorola’s mobile phone division, although here again the product is commodified and consumers choose on the basis of features and price. Southeast Asia’s indigenous consumer electronics firms are smaller and mostly OEM, although there are exceptions. As noted above, Creative Technology produces an array of consumer items marketed under its own brands, and as seen below, Sapura has moved up to original design manufacturing (ODM) arrangements under which it designs products in partnership with global players such as Nokia. In addition, Singapore is the home of the final case study firm, Flextronics, possibly the largest OEM/ODM manufacturer in the world. There are areas in the electrical and electronics industries where firms require scale to survive. Sometimes scale is a function of technology, for instance in electrical appliances or silicon wafer production (Mathews and Cho, 2000). In other areas the requirement to be or to become large reflects market conditions, notably in the commodification of laptop computers and mobile phones. China’s size means Chinese firms will have an advantage here. Average incomes in China are less than a quarter that of Japan or the United States, but as China continues to develop, the domestic market will continue to expand. There is no reason not to expect the number of internet users or mobile phone owners to continue to grow, for instance. This is good news for China’s domestic firms, but it will also attract so-called “market seeking” foreign investment (Buckley et al., 2005). Foreign firms present serious competitive challenges to domestic firms, as they typically possess both greater technological expertise and superior management skills (Wei and Liu, 2006; Liu et al., 2001). If they survive, theory predicts that some Chinese firms will leverage the efficiencies gained from scale economies at home into expansion abroad. In addition to Lenovo, Huawei has acquired overseas firms to gain technologies similar to Creative, and as seen below Haier has also made extensive overseas investments in manufacturing capacity. To succeed in the longer term, however, even these firms will need to develop the capacity to offer genuine improvements, or genuinely new products. China’s current total outward foreign direct investment remains small, a cumulative total of US$75.0 billion in 2006, only 0.7% of the world total. It is also dominated by state-owned enterprises

Frank Ben Tipton 237

(SOEs) that enjoy privileged access to funding, and that may be acting in response to government pressure to acquire overseas trophies and move into the circle of the world’s top 500 firms, an explicit government policy (Morck et al., 2008). Although ASEAN agreements to liberalise trade among member countries may create a larger market and increase Southeast Asia’s attractiveness to foreign market-seeking investors, they have not done so as yet. American, European, Japanese, and more recently Korean and Taiwanese investors in Southeast Asia have sought mainly low cost production bases (Buckley et al., 2005). Chinese firms have recently made substantial investments in Southeast Asia. Although China’s foreign investment may be small in world terms, it can bulk large in any single Southeast Asian country and possibly in the region as a whole. Predictably China’s interest has been directed towards natural resources and especially petroleum assets. However, China’s stateowned telecommunications firms have also been active. Randall Morck and his colleagues speculate that this could reflect their expertise in managing large and complex customer bases, but they are clearly dubious (Morck et al., 2008: 345). Indigenous Southeast Asian electrical and electronics firms have concentrated in the production and assembly of components designed elsewhere. Production in the Philippines and Malaysian electronics industries for instance is highly concentrated in semi-conductors based on foreign designs. Firms at the upper end of the technology chain tend to be foreign-owned, as in Singapore, or dependent on foreign orders. Existing components production and assembly operations in Southeast Asia also confront competition from China and India. In components assembly, labour cost is a decisive factor. Foreign firms can easily shift to countries with lower wages (Buckley et al., 2005). Southeast Asia’s competitiveness has depended largely on the supply of young females, with Malaysia the best known example (Kaur, 2004). As population growth has slowed and the surplus of agricultural labour has dried up, wage levels have risen, for instance in Thailand. China’s coastal provinces are already experiencing the same shift, although the country overall will not see the supply of inexpensive female labour begin to decline for several more years (Sargeson, 1999). And, as pointed out in press reports, if “Vietnam is the new China” and “Cambodia is the new Vietnam”, it would still be true that any excess labour would be quickly absorbed by a sudden large influx of foreign investment, eliminating any competitive advantage based on labour costs (Bradsher, 2008).

238 The Impact of China on the Electrical and Electronics Industry in Southeast Asia

In addition to their advantages of scale and scope, the world’s leading corporations have also normally enjoyed strong support from their governments, both direct and indirect. “There has never been a ‘level playing field’ in international competition, and it is doubtful whether there ever will be one” (Ruigrok and Van Tulder, 1995: 221; Amsden, 2001). The United States, the European Union, and Japan all have strong protectionist lobbies, and can be expected to demand as much as they can in trade negotiations, while giving away as little as they can. In recent rounds of bilateral trade agreements they have consistently refused to open their own markets to foreign competition (Freedman, 2006). China in contrast, was forced to open several previously closed sectors to foreign investment as the price of entry into the World Trade Organisation (Panitchpakdi and Clifford, 2002). In the longer run, size matters in politics as well as economics, and China’s status as a major power will bring it greater leverage with the other major powers, and will give it a substantial advantage in negotiations with smaller countries, another source of concern for Southeast Asia.

Government support for the electrical and electronics industries: Science parks and multilateral collaboration Government policies to support the high technology areas have been both competitive and collaborative. On the competitive side, one of the most visible concrete symbols of government policy is technology or science parks. As was the case previously with export processing zones, so now countries across the Asia Pacific regions are creating special districts to provide services for foreign and domestic firms (Qadir, 2001; Mitchell, 2001). The model, whether implicit or explicit, has been Taiwan’s programme of partnership between large government-supported firms, especially in silicon wafer and microchip fabrication, and small specialised electronics firms. Taiwan’s Hsinchu Science-Based Industry Park, opened in 1980, included both government funded enterprises such as United Microelectronics Corporation (UMC) and private firms, notably Stan Shih’s fledgling Acer Computers (Xue, 1997; Mathews and Cho, 2000: ch. 4). China’s first Special Economic Zones (SEZs) opened in the late 1970s were explicitly intended to recruit foreign firms, whose products would be exported, and whose advanced technologies would benefit Chinese firms. By the 1990s there were very few large cities in China that did not have some sort of zone catering to foreign firms. Local initiatives sometimes targeted electronics firms specifically. In 2000 the Beijing

Frank Ben Tipton 239

municipal government launched a project, the Zhongguancun E-Park, which provided a gateway service to a range of government agencies online and claimed to have reduced the time for approvals from an average 15 working days to an average of three days (Zhu, 2001; Lin et al., 2001). More recently the Chinese government has also emulated Taiwan’s earlier strategy of informally recruiting expatriates in high technology industries with offers of academic appointments and subsidies for start-up companies (see also Chapter 3 in this volume). ASEAN countries have placed great hopes in their technology parks. In the Philippines the former United States military base at Subic Bay was redeveloped as a special economic zone, in then-President Joseph Estrada’s words a “Cybersubic” which he also described as an “Asian Silicon Valley”. The United States base at Clark was similarly to be transformed into a special economic zone, and the Philippine Economic Zone Authority (PEZA) approved seven further ICT parks in the National Capital Region of Metro Manila and two in Cebu City. The government envisaged these ICT parks as prime locations for companies involved in software, multimedia and other content development, hardware design, prototype production and incubation, computer-based support services, research and development services; and other back-office operations, all intended to support the country’s emergence as the “e-Services hub of Asia” (http://www.itecc.gov.ph/; DOTI, 1999). The best known initiative is Malaysia’s Multimedia Supercorridor or MSC (Malaysia, MDC). Launched in 1996, the MSC is portrayed as both a physical location and an electronic “cyberspace”, and is repeatedly referred to as Malaysia’s answer to Silicon Valley. In addition the personal involvement of then Prime Minister Mahathir Mohammed, led to an international advisory panel being established, including Bill Gates of Microsoft, Larry Ellison of Oracle, and Nobuyuki Idei of Sony. The government planned the project to extend over 20 years, at the end of which Malaysia was expected to have achieved leadership in the Information Age. The MSC is a zone 15 kilometres wide and 50 kilometres long stretching from Kuala Lumpur south to the new international airport and two new cities, Putrajaya and Cyberjaya. Cyberjaya, the new “e-commerce center”, is a 7,000-hectare development described as the world’s first planned intelligent city. The parallel development of Putrajaya is as a high technology national administrative centre. Both are connected to Kuala Lumpur by a high capacity fibre optic Internet backbone. A new Multimedia University is located inside Cyberjaya, for instance, and the MSC also is intended to have close ties with other universities throughout Malaysia.

240 The Impact of China on the Electrical and Electronics Industry in Southeast Asia

On the collaborative side, international agencies have also driven domestic agendas. At its meeting in 2000, the APEC leaders announced a plan to bridge the digital divide over the next ten years, and pledged to triple the number of Internet users in the region to 750 million by 2005. Many of APEC’s programmes, such as customs harmonisation, government procurement, industry standards, and regulatory reform, rely on computerised systems. Industry interest played a role in the background. According to news reports, the initiative had been driven by the United States officials, supported by United States electronics firms hoping that the new programmes would open markets for their products (Ghahremani, 2001). In 2000 the fourth ASEAN Informal Summit adopted the e-ASEAN Framework Agreement, with four basic aims: (a) promote cooperation to develop, strengthen and enhance the competitiveness of the ICT [information and communications technology] sector in ASEAN; (b) promote cooperation to reduce the digital divide within individual ASEAN Member States and amongst ASEAN Member States; (c) promote cooperation between the public and private sectors in realising e-ASEAN; and (d) promote the liberalisation of trade in ICT products, ICT services and investments to support the e-ASEAN initiative (ASEAN Secretariat, 2006). The agreement specified that where possible, ASEAN governments should accelerate their efforts by 2002. With regard to infrastructure, “Member States shall enhance the design and standards of their national information infrastructure with a view to facilitating interconnectivity and ensuring technical inter-operability between each other’s information infrastructure”, and in addition, “Member States shall work towards establishing high-speed direct connection between their national information infrastructures with a view to evolving this interconnection into an ASEAN Information Infrastructure backbone”. To facilitate electronic commerce member states were to “put in place national laws and policies relating to electronic commerce transactions based on international norms”. Trade in electronics products and services and related investment was to be liberalised, with Mutual Recognition Arrangements (MRA) covering ICT products and all duties and non-tariff barriers eliminated in 2003–2005, though with a delay to 2008–2010 for Cambodia, Laos, Myanmar, and Viet Nam. Every member

Frank Ben Tipton 241

state was to “open immediately its ICT products to investments by ASEAN investors”. China has consistently argued that the digital divide is primarily an international problem, not an internal question to be dealt with by each nation individually. China has been particularly enthusiastic in supporting multilateral action, pushing for instance for “measurable” outcomes of APEC initiatives under the slogan e-APEC. In 2003 China and ASEAN signed a Memorandum of Understanding on Cooperation in ICT. China agreed to provide training for ICT personnel from ASEAN countries. China and ASEAN agreed to produce Mutual Recognition Agreements for ICT skills certification. And, potentially most important for the poorer ASEAN countries, China agreed to assist in the construction of infrastructure projects. In 2005 China and ASEAN representatives signed the Beijing Declaration on ASEAN-China ICT Cooperative Partnership for Common Development. Subsequent workshops in 2006 concentrated on building more effective computer emergency response teams, rural communication and universal services, and an “information superhighway” project under the Greater Mekong Sub-region (GMS) framework. A further ministerial level meeting in 2006 reaffirmed the need “To facilitate intra-regional trade, investment, and logistics, particularly in light of ASEAN-China FTA”, and agreed that “studies may be conducted on e-commerce and e-government, regional standards, and MRAs for telecom equipment certification and ICT expertise certification”. The ministers also agreed to expedite the implementation of the GMS Information Superhighway project and to explore the possibility of expanding it to cover all ASEAN countries, to establish an “ASEANChina Information Superhighway”. They further agreed “to put greater efforts into enhancing rural communication and universal services and to consider the implementation of pilot projects involving actual application of suitable technology in selected rural areas in the region” (ASEAN Secretariat, 2006).

Structural constraints on entrepreneurship in China and Southeast Asia Both national and multilateral initiatives are intended to stimulate development in the electrical and electronics industries, to improve overall economic efficiency, stimulate development, and improve living standards. To accomplish this, both China’s and Southeast Asia’s industry needs to move up the value chain, but this is difficult. China and the nations of

242 The Impact of China on the Electrical and Electronics Industry in Southeast Asia

Southeast Asia have in general not been the originators of these technologies. Because the technologies come from outside, there is a need for individuals or firms to identify them, acquire them, adapt them, and make them available. Based on the considerations regarding technological progress offered above, it can be argued that even more than the United States, Europe, or Japan, China and Southeast Asia need entrepreneurs to spur development. Joseph Schumpeter, the original theorist of entrepreneurship, said entrepreneurs are not inventors, but innovators. Their talent is not to create opportunities, but to recognise them. Their problem, however, is that they do not possess the resources to realise their vision. For that they require another figure that Schumpeter labelled the “banker”, a person or institution from which entrepreneurs can borrow the money they need to achieve their goals. Entrepreneurs take risks, but in Schumpeter’s view they typically do not risk their own money, but money that they have borrowed from others (Schumpeter, 1934; Hew and Nee, 2004). For an entrepreneur, and particularly a person with the expertise and an idea for a new electronic product or process, the business landscape in China and Southeast Asia can appear particularly unpromising. The World Bank has assembled comparative information regarding the conditions imposed by governments on business (World Bank, 2004). Some of the results for Southeast Asia are given in Table 7.1 and for Hong Kong and China in Table 7.3, and compared to the United States. To begin with, it is not easy to establish and operate a business. Starting a business is cumbersome in terms of the number of procedures, time consuming, and expensive. Laws affecting the hiring and firing of workers, and those regulating conditions of employment, are also relatively restrictive. Should something go wrong, it is also complex and very expensive to enforce a contract. Singapore appears the exception, but here too the intrusive hand of the state has restrained entrepreneurial initiative. Sim Wong Ho is celebrated in part because he is unusual and because the government worries about the absence of entrepreneurs, particularly in high technology areas such as electronics (Lee and Low, 1990; Hew, 2004). Schumpeter’s banker is absent in both China and Southeast Asia. A point emphasised by the World Bank is the difficulty that businesses face in obtaining finance in developing countries (World Bank, 2004: ch. 5). Governments have frequently directed banks to lend to government-owned enterprises. In China as noted above state-owned enterprises enjoy preferential access to finance. Private entrepreneurs insist that it is very difficult for private firms to obtain bank loans. Many

Table 7.1

Indicators of conditions of doing business in Southeast Asia, compared to the United States, 2004 Cambodia

Indonesia

Laos

Malaysia

Philippines

Singapore

Thailand

Viet Nam

USA

12.3 280 na

209 710 19.4

5.4 310 na

23.8 3,540 31.1

78.3 1,020 43.4

4.1 20,690 13.1

61.2 1,980 52.6

79.5 430 15.6

285 35,060 8.8

11 94 554 1,826

11 168 15 302

9 198 20 151

8 31 27 0

11 59 24 10

7 8 1.2 0

9 42 7 0

11 63 30 0

5 4 0.6 0

20 210 269

29 225 269

na na na

22 270 19

28 164 104

23 50 14

19 210 30

28 120 9

17 365 0.4

Economic structure Population (millions) Income (US$ per capita) Informal economy (%) Starting a business Number of procedures Time in days Cost (% of income) Minimum capital (% of income) Enforcing a contract Procedures Time in days Cost (% of income)

Indexes of flexibility in labour relations (a score of 0 means the government imposes no regulations on employers; 100 is the maximum score) Hiring Conditions Firing Employment law

33 81 49 54

76 53 43 57

33 87 44 54

33 26 15 25

58 73 50 60

33 26 1 20

43 77 48 56

33 29 5 22

243

Source: World Bank, Doing Business 2004: Understanding Regulation (Washington, D.C.: World Bank and Oxford University Press, 2004). Notes: “na” means not available. “Income” is gross national income per capita, in US dollars. The size of the informal economy, where available, is expressed as a percentage of total gross national income. Cost is expressed as a percentage of gross national income per capita. Minimum capital is expressed as a percentage of gross national income per capita.

78 73 30 61

244 The Impact of China on the Electrical and Electronics Industry in Southeast Asia

complain they cannot obtain a loan from the financial institutions without paying a kickback (McDonald, 2004). Private firms that do gain bank finance must pay market rates, while state-owned enterprises may pay only half the official market rate for their loans. As a result, especially if they are small, many private firms obtain funding in a variety of informal regional markets (Tsai, 2002) In Southeast Asia governments have directed banks to lend to particular economic groups such as farmers, or to particular ethnic groups such as Malays under Malaysia’s New Economic Policy. Private banks have frequently been under the control of family business groups, and have catered primarily to other related firms belonging to their groups. In addition, looming on the business horizon in all Southeast Asian countries are massive family conglomerates and government enterprises. Some of the indicators of their size and relative position are given in Table 7.2. Some government enterprises are legal monopolies. Some, as in the telecommunications industry, are now partly or wholly privatised, but remain dominant, and have branched into other areas, for instance telecoms that have moved into communications equipment and electronics (Tipton et al., 2003: ch. 2). Government enterprises, including Singapore’s government-linked companies such as Singapore Technologies Group, have access to state funding. With their private banks, the family conglomerates also have the resources to move into new areas once they have been identified. Large and diverse groups, whether government-owned or private, may expand into new areas for strategic reasons, simply to establish a presence or to exclude outsiders, and these initiatives may be subsidised by other more profitable members of the group. In China, Deng Xiaoping blessed the private sector when he said, “To be rich is glorious”, and more recently in 2002 an official announcement at the Sixteenth Party Congress proclaimed that the government would support the growth of private business (Tipton, 2007: ch. 6). However, relations between private business leaders and government officials are not always smooth. The contrast between the situation of Hong Kong and China seen in Tables 7.3 and 7.4 only hints at the complexity of the situation, for each province can have very different regulatory structures. The differences persist down to the local level. Enforcement of contracts can depend on the favourable attitude of local officials. Local officials also affect the degree of competition permitted in local markets. In urban districts local labour bureaus can intervene in relations between employers and employees. Any form of real estate development requires official approval and cooperation.

Table 7.2

Corporate structure in Southeast Asia Family ownership

Conglomerate structure

Financial markets

Government enterprises

Indonesia

15 families control 62% of share market capitalisation

Large and diverse; 300 groups own 10,000 units across all sectors

Banks nationalised after 1997; groups prefer debt; share market capitalisation less than 20% of GDP

State controls over 40% of national assets

Malaysia

Families control over 40% of listed companies

Large and diverse; often connected to state enterprises

Banks independent; market capitalisation 124% of GDP, but not liquid

State owns 35% of market capitalisation; state enterprises produce 10% of national output

Philippines Five families control 42% of share market capitalisation

Large and diverse; second highest level of cross share-holding in Asia, behind Japan

Groups control banks and prefer debt; only 80 of top 1,000 firms are publicly listed

179 state enterprises, mostly infra-structure and finance

Singapore

Ten families control 25% of corporate sector

Large private groups limited State-owned banks dominant, to light manufacturing, but families control three of real estate, and banking four listed banks; market capitalisation 250% of GDP, including many foreign firms

Thailand

Most owners and directors from 300 to 400 elite families; ten families control half of all corporate assets

Large and diverse; holding companies control both listed and unlisted subsidiaries

Viet Nam

Private sector includes 30,000 non-state business entities, and one million households, mostly family businesses

Most private firms are small Six state-owned banks hold and therefore operate in only 75% of banking sector assets one sector

Extent of state ownership not clear, but at least 12% of sales, 19.5% of profits, 23% of assets of largest 500 firms

Groups control banks, prefer 50 state enterprises, some debt; very thin market; “family with monopolies in their controlled firms often list industries only to gain tax concessions” 30% of GDP, 42% of industrial output; 50% of exports; 1.6 million workers, about 5% of labour force

245

Source: Australia, Department of Foreign Affairs and Trade, Economic Analytical Unit, Changing Corporate Asia: What Business Needs to Know (2 vols.; Canberra: EAU, 2002).

246 The Impact of China on the Electrical and Electronics Industry in Southeast Asia

Public listing, important for any firm wanting to grow and crucial in new areas, also needs official approval, and has been largely reserved to state-owned enterprises (Bruun, 1993; Wank, 1999; Morck et al., 2008). Despite superficial modernisation of the legal system, the Chinese government continues to view laws as an instrument to give it control

Table 7.3 Indicators of conditions of doing business in Hong Kong and China, compared to United States, 2004 Hong Kong

China

USA

6.7 24,750

1,272 940

285 35,060

16.6

13.1

8.8

5 11 2.3 0

12 46 14.3 3,856

5 4 0.6 0

17 180 6.9

20 180 32

17 365 0.4

Economic structure Population (millions) Income (US$ per capita) Informal Economy (%) Starting a business Number of procedures Time in days Cost (% of income) Minimum capital (% of income) Enforcing a contract Procedures Time in days Cost (% of income)

Indexes of flexibility in labour relations (a score of 0 means the government imposes no regulations on employers; 100 is the maximum score)

Hiring Conditions Firing Employment law

58 22 1 27

17 67 57 47

33 29 5 22

Source: World Bank, Doing Business 2004: Understanding Regulation (Washington, D.C.: World Bank and Oxford University Press, 2004). Notes: “na” means not available. “Income” is gross national income per capita, in US dollars. The size of the informal economy, where available, is expressed as a percentage of total gross national income. Cost is expressed as a percentage of gross national income per capita. Minimum capital is expressed as a percentage of gross national income per capita.

Table 7.4

Corporate structure in Hong Kong and China Family ownership

Conglomerate structure

Financial markets

Government enterprises

Hong Kong

Families control 72% of share market capitalisation; families own more than half the shares in 53% of listed companies

Large and diverse; cross shareholding and pyramid structures control both listed and unlisted subsidiaries. Family groups control some smaller banks

Concentrated; HSBC (40% of deposits) controls Hang Seng, the third largest. HSBC and Standard Chartered (second largest) are listed overseas. Bank of China Group 25% of deposits) is owned by the Chinese government

Government controls infrastructure, and owns over one-quarter of total share market capitalisation, some acquired after 1997 crisis; plans to divest

China

Private sector 20% of value added; most firms small and family-owned; private firms first allowed to list on stock exchanges in 1999

Some state-owned enterprises control large diverse groups

Highly concentrated and mostly state-owned; four largest banks account for 62% of loans; some equity sold to foreign banks in early 2000s; foreign banks allowed to operate under WTO rules

State-owned enterprises 28% of value added; cooperative enterprises 38%; continued corporatisation; SOEs usually list less than 50% of their shares

Source: Australia, Department of Foreign Affairs and Trade, Economic Analytical Unit, Changing Corporate Asia: What Business Needs to Know (2 vols.; Canberra: EAU, 2002).

247

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over society, not as a set of rules regulating relations among citizens and between citizens and the state (Chen, 1999). Courts, although nominally independent, are administrative organs, and as such they are subject to various forms of political pressure. Judgements and enforcements are inconsistent, and officials and well-connected individuals can and do use the law to pursue their own agendas. This affects the electrical and electronics industries particularly in the area of intellectual property. There are widespread complaints that China is not adhering to its WTO commitments, and there are cases of technology being appropriated by joint venture partners with the connivance of local officials and courts (Farah, 2006). Finally, in both China and Southeast Asia, foreign firms are also active and dangerous competitors. Deregulation and the opening of markets to new entrants can place indigenous firms at a disadvantage. Further, although foreign investment is strictly regulated, governments also see foreign investment as a lever for development (Tipton, 2005). In addition to their technological capabilities, capital resources, and management expertise, therefore, foreign firms may benefit from preferential tax treatment, access to favoured export processing zones, or receive direct subsidies. Flextronics is one among many foreign firms to receive a range of tailored benefits from Singapore’s Economic Development Board (see Schein, 1996). In contrast, in 1989, Sapura lost a large contract to supply telephones to Malaysia’s government telephone company to a Taiwanese manufacturer that enjoyed tax exemptions and other benefits because of its “pioneer” status in the Prai free trade zone near Penang. Angry Sapura CEO Abdul Kadir Shamsuddin pleaded publicly for a “level playing field” for local firms (Searle, 1999: 172). A new business in China or Southeast Asia in a promising area therefore faces problems on at least three and possibly four fronts. Complex and costly regulations will hamper establishment and operations. Finance will be difficult or impossible to obtain. Domestic competitors linked to the government sector or to large family groups will enjoy greater financial resources, and may have privileged access to government agencies. Foreign competitors will also enjoy ample funding, they may have greater technological and managerial capabilities, and they may benefit from preferential government treatment as well. Government officials typically believe themselves to have the right to dictate to and impose conditions on private firms. However, in fact state capacity is typically low (Painter, 2001). Except for Singapore, administrative and regulatory officials are often inadequately trained and poorly paid, and corruption is a widely reported problem (Trans-

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parency International; Welch, 2007). In the next sections of the chapter, I turn to address examples of highly successful firms, but it is well to remember that in the existing historical, institutional, and competitive context, even the most dedicated and energetic entrepreneur would find success difficult to achieve.

Sapura group and Malaysian entrepreneurship It has been argued that domestic firms in Southeast Asia have failed to innovate, not because of the institutional constraints outlined above, but because they are unwilling to do so. In the 1980s Japanese economist Kunio Yoshihara described indigenous businesses in Southeast Asia as “ersatz” (artificial) capitalism. He believed that successful domestic firms were in fact rent-seeking groups, whose position depended not on their economic efficiency, but on their contacts with government. This reflected, in Yoshihara’s view, three factors. First, low levels of investment in science and technology by both government and private firms had left Southeast Asia technologically backward. Second, the low quality of government intervention in the economy had led to reliance on subsidies and to the domination of the economy by ethnic Chinese. Third, the absence of a strong domestic capitalist class had led to a reliance on foreign firms to provide advanced technologies. Indigenous capital remained confined largely to the tertiary sector, and indigenous industrial capital could not drive development “because it does not have an export capability” (Yoshihara, 1988: 3, 122–131). Yoshihara’s thesis has been extensively debated (Searle, 1999: ch. 1). Despite criticisms, into the 1990s there were aspects of corporate structure in Southeast Asia that supported his arguments (Bello and Rosenfeld, 1990; Clad, 1990). Private firms benefited from connections to influential persons. The state sector expanded to dominate many sectors. The number of public enterprises in Malaysia, for instance, rose from 22 in 1960 to 109 in 1970, 656 in 1980, and 1,149 in 1992. The growing state sector supported the ruling political party (the United Malays National Organisation, UMNO) but it also reflected the government’s concern that there was no indigenous Malay (bumiputra) capitalist class. (Each of these is now in doubt, in light of recent and ongoing changes in Malaysian politics). Many observers asserted that government enterprises did not develop the capabilities that would have made them internationally competitive. In 1989 the Malaysian government’s own mid-term review of the Fifth Malaysia Plan said, “the performance of heavy industrial projects sponsored by the public sector was far from satisfactory. A number

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of these project suffered heavy financial losses due to the sluggish domestic demand and the inability of the industries concerned to compete in international markets” (Gomez and Jomo, 1997: 31, 78) Sapura Holdings parallels the history of Malaysian capitalism and its connection to the government, but contradicts the thesis of “ersatz” capitalism in important ways. The firm was incorporated in 1975. Founded by Abdul Kadir Shamsuddin, it operated from a one-room office in Kuala Lumpur and was named after his wife, Siti Sapura. Trained as an electrical engineer in Britain, Abdul Kadir began his career in 1959 with Jabatan Telekom Malaysia (JTM), Malaysia’s governmentowned telecommunications company, rising to head its operations in the state of Perak. In 1971 he left JTM and joined United Motor Works (UMW), controlled by Malaysian-Chinese businessman Eric Chia, and there he rose in five years to become executive chairman. UMW owned a company called Uniphone Works that leased tabletop payphones to shops, but the business had been losing money. In 1975 Abdul Kadir left UMW and purchased Uniphone Works, using a loan of RM400,000 (around US$160,000) from the government-owned Bank Bumiputra, and a further loan of RM1,158,000 (US$463,000) granted by Chia. JTM had decided to privatise its loss-making payphone service in 1975, and Uniphone’s experience in splicing and jointing phone networks allowed it to tender successfully for a ten-year licence to supply, install, and maintain payphone services throughout Malaysia. In 1989 the licence was extended for a further 15 years. Sapura also laid cables for JTM in the 1970s and 1980s (Gomez and Jomo, 1997). In 1984 Sapura gained control of Malayan Cables, a backward linkage that assured its cable supply. Malayan Cables then bought Uniphone, and Sapura was listed as a separate telecommunications company. By the early 1990s Abdul Kadir, as head of both Uniphone and Sapura, had diversified into production of payphones, feature mobile phones, PABX exchanges and other large-scale equipment, and in addition had won the distribution rights for Apple Computers in Malaysia, Singapore, and Brunei. Sapura’s relations with the government aided its success. In addition to the initial loan from Bank Bumiputra, among other connections, Abdul Kadir served as a director of one of the holding companies controlled by UMNO. However, Sapura also extended its reach of contacts outside Malaysia and worked to deepen its own technical expertise. Rather than merely supplying equipment to the government, Sapura developed the capacity to manufacture, and rather than merely copying or licencing foreign designs, Sapura invested heavily in R&D and

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formed partnerships with major foreign firms including Siemens, GEC Plessy, Sumitomo, and Nokia, to gain access to their technologies. A decline in the Malaysian currency in the late 1980s made its products more price competitive in international markets, and Sapura began exporting. Rather than confronting large international firms head-on, however, Sapura looked for niche markets, supplying for instance feature phones to ITT, Net of Japan, and Alcatel of Belgium. By 1993 exports accounted for some 24% of Sapura’s total sales (Gomez and Jomo, 1997; Searle, 1999). Expansion continued through the 1990s. Sapura’s interests are now widely spread. Sapura Energy includes SapuraCrest Petroleum, an offshore drilling and services company, STB (Sapura Technology Berhad) whih claims to be “Malaysia’s leading ICT company” and includes a range of hardware and software providers, Sapura Industrial, which designs and produces automotive parts and modules, Sapura Resource Berhad, an educational provider that includes two tertiary-level technology and management institutions, and Sapura Defence, which provides simulation, air traffic control, maritime electronics, and avionics systems and training. Unlike the other listed group members, Sapura Defence does not report results, but is described both as “one of the country’s leading defence partners”, and also as “a recognised player in the regional defence market”. In mid-2005 Sapura also secured a dealership for BMW automobiles. Abdul Kadir’s son Shahril Shamsuddin was educated in the United States at California Polytechnic and MIT. Shahril joined Sapura in 1985, and by the late 1990s had taken over much of the group’s executive responsibilities. Observers credited him with the shift in focus from telecommunications to information technology (Asiaweek, 1999). Sapura is closely linked to Malaysia’s e-government and smart school initiatives. In 2005 Shahril was named to the board of the Multimedia Development Corporation (MDC), the government-owned corporation that coordinates the Multimedia Supercorridor project (Malaysia, MDC). He also serves as board member and treasurer of the blue ribbon Perdana Leadership Foundation headed by former Prime Minister Mahathir Mohammad. Sapura’s current financial reports and a variety of seasonal ring tones can be downloaded directly from its website onto joint venture partner Nokia’s mobile phones. The website is heavy with inspirational slogans, such as “Ideas do not come to those who wait. They come to those who innovate.” Sapura is unquestionably an entrepreneurial company. Its success clearly refutes the argument that Malays are incapable of

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entrepreneurial initiative. It also demonstrates the ways in which an indigenous Southeast Asian firm can leverage its own expertise in partnership with foreign firms to develop its own competencies, and leverage these in turn into new areas. In contrast to the pessimistic picture painted by Nolan outlined above, Sapura has generated economies of both scale and scope, particularly through the synergies of IT applications across all of its divisions. High-end presentation software, for instance, forms a platform that can be used for aircraft pilot training and ground control in systems sold by Sapura Defence, but also in educational applications offered by Sapura Resource. However, Sapura’s diversity raises the questions of management control and focus. Despite public listings, it is a family firm, and at some point will have to make the transition to professional managerial control. Two of its interests, mobile phones and automotive components, are intensely competitive internationally. Much of the development in the IT sector is now also commodified, and also highly competitive. MDC has been described in the Malaysian press dismissively as “another property development scheme”. The BMW dealership may be potentially important in the liberalising automotive markets of Southeast Asia, but it is not a technological partnership such as those with foreign electronics firms. The foreign IT partnerships have been highly successful in the past, but Sapura remains either a vehicle for foreign firms to enter the Malaysian market, or a supplier of products that foreign firms sell in their own markets. Large by Malaysian standards, like other indigenous Southeast Asian firms it is neither truly large nor a recognised name internationally, although its technical competencies place it in a good position for the future.

Zhang Ruimin and the Haier Group Haier Group is one of several Chinese firms that have achieved spectacular success over the past two decades. In 2003, Haier had become the fourth largest home appliance firm in the world, with 96 major lines, 15,100 models, and sales in 160 countries, including a 30% share of the market for small refrigerators in the United States. In 2004, Haier’s website featured a statement by the Chairman of the group, Zhang Ruimin: Haier should be like the sea. Because the sea can accept all the rivers on earth, big and small, far and near, coming all the way to empty into it.

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Once in the bosom of the sea, every drop will function as a whole and rush together pertinaciously and dauntlessly, under the command of the sea, to a common goal. They will rather be smashed to pieces than retreat as deserters, hence the overwhelming force of the sea. The sea offers all of itself to the mankind and never demands anything in return. Only through this bounty and unselfishness can the sea become an everlasting existence providing for all living beings. Haier should be like the sea – accepting all talented people from around the world for an ambitious goal. Every Haier employee should be capable rather than mediocre and redundant, for they are the backbone and guarantee of Haier’s future development. Concerted efforts will generate power of the sea. This will be backed by a spirit – “Dedication to the Motherland by Pursuing Excellence” which Haier persistently advocates. Therefore, everything deemed unbelievable and impossible can be real and possible, and the Billow of Haier will rush past everything on its way and roll on and on. Thus, Haier should be like the sea – making contributions to the mankind “sincerely forever”. In so doing, it will exist forever for the good of all. Haier will be part of the whole society. Haier is the sea (Zhang, 2004). In 1984 Zhang, then the vice-manager of Qingdao Home Appliance Company, was appointed head of Qingdao Refrigerator General Factory, a heavily indebted state-owned enterprise. He lined up 76 defective units out of the 400 on the plant floor, and ordered those responsible to destroy them with a sledgehammer. “The real problem was that workers had no faith in the company and didn’t care”, he said in a 1999 interview. They had to learn, he said, that “there is no A, B, C, or D level of quality. There are only two, acceptable and unacceptable” (Business Week, 1999). The firm entered into a joint venture with a German firm to improve its technology and was renamed Qingdao Haier Refrigerator Company. Astonishing growth followed. In 2003, Haier employed some 30,000 workers, and its subcontractors another 200,000. In addition to four “industrial parks” in Qingdao, there were factories in four other cities in China, and in the United States, Pakistan, and Jordan. Sales, as noted above, were worldwide and included a substantial share of the world’s single largest consumer market in the United States.

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Haier’s website continues to celebrate Zhang’s leadership. His biography lists his international awards and presents the firm’s history in terms of his ideas, 1984–1991, Zhang’s “famous brand strategy” of improving quality, 1991–1999, Zhang’s “diversification strategy” implemented “to avoid having all one’s eggs in the same basket”, and since 1999, Zhang’s “multinational strategy” of onethird of production in China for domestic sales, one-third of production in China for export, and one-third of production overseas for foreign sales. Zhang, according to the site, has succeeded by “combining traditional Chinese culture with advanced Western management concepts”. Intriguingly, the two specific management concepts mentioned on the site are typically Japanese. A programme of total quality control (TQC) implemented in the 1980s underpinned Zhang’s efforts to establish Haier as a recognised brand. Through the 1990s a programme of just in time (JIT) inventory management led to cost reductions and, like large Japanese firms, Haier has imposed its JIT approach on its subcontractors (see Tipton, 2007: ch. 2). Haier’s human resource management looks much less Japanese. Employees are encouraged to think in terms of strategic business units and even to consider themselves as Single Business Units (SBUs), but Zhang posts a “hit chart” of the 80 divisional heads outside the headquarters staff canteen, with their latest monthly performance rating and an arrow pointing up or down. The top 10% can expect promotion, and the bottom 10% demotion or worse. In 2002–2003, 13 of the 80 fell and were replaced (McDonald, 2003). Zhang is one of the great leaders of modern business, but his success is hard to evaluate. Apart from a figure for total sales, no financial information is available on the website. Haier’s ownership remains opaque. Officially, Haier is a “collectively-owned” enterprise. In a dispute over Internet domain names in 2001, Haier identified itself as “a super-large state-owned enterprise”. Ming Zeng and Peter Williamson (2003) report that “the Qingdao municipal government, local investors, and the company’s managers, jointly control Haier’s equity”, but this may not include the entire group. Haier listed on the Shanghai Stock Exchange in 1993, and raised further funds with three additional rights issues in the 1990s, but the listed firm is a subsidiary, and these investors play no role in corporate governance. The group has enjoyed continual government support. Haier, as emphasised by Robert Crawford (2000) and by Zeng and Williamson (2003), “grew rapidly by acquiring dozens of unprofitable collective

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and state-owned enterprises in the early 1990s”. This can only occur with the consent of the agencies involved. The stock exchange listing and rights issues also required government approval. In the 1990s the website featured a picture of Deng Xiaoping visiting Haier’s main plant. The website currently does not mention the Party, but according to a Business Week report, Zhang “leads a network of Communist Party members who work at Haier” (Business Week, 1999), and he has become a member of the Party’s national central committee. The government facilitated the plants in Pakistan and Jordan. Haier belongs to the group of firms the government supports as “famous Chinese brands”, and is one of the six selected to become “World Top 500 Enterprises”. Today Haier sells at premium prices in China, and within China has clearly achieved its goal of becoming a recognised brand for purchasers of home appliances. However, in foreign markets it remains largely unknown. Haier has not developed genuinely innovative technologies that could set it apart from its main global rivals. Outside of China it remains primarily an OEM producer. Its products are high quality, and include for instance many of the “European” home appliances sold in Australia, but Haier is not recognised in its own right. Haier also designs products to suit particular niche markets, and has achieved some notable successes. Haier’s wine refrigerators have taken a large share of the United States market, for instance. However, again there are potential problems. Niche markets are by their nature limited, and some foreign observers believe the group maintains an excessively broad product portfolio. Haier’s future is of course, tied to China’s future. Those who believe that China can continue its rapid growth and overcome the accompanying problems will be optimistic. Those who are more pessimistic about China (for instance Chang, 2001) will be correspondingly pessimistic about Haier. Despite the undoubted successes of the growthby-acquisition strategy, diversification has led Haier into a number of highly competitive areas. Financial services and logistics build on the group’s sheer size, but televisions, video cassette recorders, and mobile phones are only distantly related to its core competencies, and software development, pharmaceuticals, and a chain of restaurants appear speculative at best. The Hong Kong telecommunications firm acquired during the technology boom as of the late 1990s has apparently made losses since the collapse. Whether Haier can continue on its upward trajectory after Zhang’s inevitable retirement is unclear. Haier has engaged in a fair bit of monument building and trophy collecting, and in some cases appears

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to have confused symbol with substance. The Qingdao headquarters, in Haier Park, is on Haier Road, and the park also contains a Haier Technology Museum. Camden, South Carolina, where Haier’s United States plant is located, also re-named one of its streets after Haier. The website enthused that the United States headquarters opened in 2002 was a “landmark classical building, the former offices of the Greenwich Savings Bank, on Broadway, Manhattan, New York, an indication that Haier had moved into a new phase for globalization”, but exactly what role the New York headquarters plays is not clear. In 2003 Haier set up an electric billboard among the other gaudy displays in the Ginza shopping district in Tokyo as evidence of its determination to succeed in Japan, but the group’s strategy for the Japanese market is also not clear.

Flextronics Flextronics is a possible example of where Asia’s electrical and electronics industry may go. A huge OEM/ODM provider, the company makes electronics products for other firms, who then market the goods under their own brand names. Incorporated in Singapore, Flextronics had revenues of US$15.3 billion in 2006. It is unusual among major multinational firms in having sales relatively evenly spread among all three of the major markets in the United States, Asia, and Europe (Rugman, 2005). The firm describes itself as an “electronics manufacturing services” company that operates in 30 countries and will design, build, ship, and service products for its customers anywhere in the world. The website boasts that 6,000 product design engineers can be deployed to service customer requirements. Although incorporated and headquartered in Singapore, Flextronics is an American firm. The firm was founded in 1969 in California. It opened a facility in Singapore in 1981 and shifted its corporate headquarters and listed there in 1990, but kept much of its management functions in San Jose (Strach and Everett, 2005). Michael McNamara, the chief operating officer since 2001, has degrees from the universities of Cincinnati and Santa Clara, and was the CEO of Relevant Industries, which Flextronics acquired in 1994. Thomas Smach, the chief financial officer, is a graduate of SUNY Binghamton and was the CFO of DII Group, taken over by Flextronics in 2000. Peter Tan, president and managing director of Flextronics Asia, has degrees from Chicago and Golden State University, previously worked for National Semiconductor, Molex’s Singapore branch, and Apple’s Asia-Pacific div-

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ision, and was managing director of JIT Electronics when Flextronics acquired that firm in 2000 (Forbes, 2007). The board members are all from the United States, except for one from India and Singaporean Lip-Bu Tan, who also serves on the board of Creative Technology, the best-known among Singapore’s electronics firms. Flextronics’ major production facilities are “industrial parks” in low cost locations, which incorporate all stages of production, and provide accommodation for subcontractors, to save on transport costs, There is one in Gdansk, Poland, two in Hungary, one in Guadalahara, Mexico, one in Sorocaba, Brazil, and two in China, one in Doumen, in the Zhuhai district in Guangdong, and the other in the Pudong district in Shanghai. The most recent was opened in 2006 in Chennai, India. In addition to the industrial parks, Flextronics has production facilities in several other European countries and several states in the United States. In Asia, there is one plant in Japan, one in Taiwan, one in Singapore, five in Malaysia, eight additional locations in China, and one additional in India. Although Flextronics produces a very broad variety of products, it focuses on several carefully selected areas, automotive, computing, consumer digital, industrial, infrastructure, medical, and mobile communications. In each case Flextronics concentrates on the electronics components incorporated into the final products. In addition it has a further focus on the components it emphasises: antennas, camera modules, power systems, wireless modules, printed circuit boards, and thin transistor (TFT) and liquid crystal display (LCD) units. Expansion has come largely through acquisition. Flextronics purchases firms with technological capabilities that can extend its current strengths. Areas where it feels it cannot maintain a significant advantage are divested. A software development division was sold in 2006, for instance. Flextronics’ major customers include Kodak, Xerox, the Canadian IT firm Nortel, and Japanese firms Kyocera and Casio. Some of these relationships have developed into joint ventures. Recently Flextronics has moved to a model in which it purchases or leases the existing production facilities of its customer, with a multi-year agreement to supply products. This frees up capital for the customer and allows that firm to concentrate on design, brand management, and marketing. In 2006 Flextronics announced an alliance arrangement with SemIndia (http://www.semindia.com) to use memory chips produced by SemIndia in products produced for them, including mobile phones, television set-top boxes, and personal computers.

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The “Fab City” semiconductor facility in Hyderabad is seen by both Flextronics and by the state government as a major support for the ongoing development of the regional electronics industry. Flextronics has benefited substantially from the “tournaments” waged among developing countries to attract foreign investors. Because Flextronics is structured as a holding company, each of its subsidiary companies is treated separately for tax purposes in the country where it is located. When the firm registered in Singapore, Flextronics was granted “pioneer status” by the Singapore Economic Development Board, which meant that it was exempt from tax. Although the tax exemption lapsed, other benefits continued. Throughout most of the 1990s, Flextronics’ Malaysian operations also enjoyed “pioneer status” granted by the Malaysian government, and paid no tax. Operations in China were located in SEZs, and again paid no tax for a term of years and preferential rates thereafter because of their status as “Foreign Invested Enterprises”. In 1996 one subsidiary’s headquarters was shifted to Mauritius, which had a zero tax rate. The European industrial parks are also located in SEZs in Poland and Hungary, where they enjoy preferential treatment. Not everyone is happy, however. The Czech government and the municipal government of Brno also granted substantial subsidies to Flextronics, and were infuriated when the Brno plant was shut down in 2002, production shifted to Hungary and China, and 1,000 Czech employees “lost their jobs virtually in the blink of an eye” (Strach and Everett, 2005: 205). Further points about Flextronics include the relatively low salaries paid to its senior executives, US$850,000 to CEO McNamara and US$350,000 to CFO Smach, for instance. These are supplemented by substantial bonuses, and by an extensive share option plan. Flextronics is listed on the Nasdaq exchange in the United States, but has never paid a dividend, so employees with share options are motivated to perform in order to raise the listed price of the shares. It is also significant that leadership in the company passed seamlessly from Michael Marks, CEO from 1994 to 2005, to McNamara, the former head of one of the firms acquired by Flextronics. As with Smach and Tan, McNamara’s integration into the firm shows that Flextronics acquires not only firms and technologies, but also key people, and knows how to retain them. In contrast Sapura is a family firm, and Haier is still in part a state-owned enterprise, and it is not clear that either Shahril Shamsuddin or Zhang Ruimin have cultivated successors in the same way.

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Conclusion Flextronics also raises the question of the relevance of national labels in the electrical and electronics industries. Technologies, firms, investments, and markets are global and protean. However, government policy does play a role, as seen in different ways in all three cases. Policy responses in China and Southeast Asia have included bilateral trade agreements, multilateral trade agreements, infrastructure development, education and training, and targeting of new technologies. In a number of cases the targeted technologies have been in branches dominated by state-owned enterprises, and therefore the technological project has intersected with the worldwide trend favouring deregulation and privatisation. Government can play a role, but it requires vision and patience. Taiwan’s semiconductor industry depended on a combination of direct government support, industry involvement, and personal contacts between government officials and overseas Chinese, and the incubation of firms such as Acer extended over two decades (Mathews and Cho, 2000: ch. 4). The potential of these new technologies is revolutionary. It is easy to see ways in which developing countries could jump over one or several stages that more advanced economies have had to pass through. On the production side this can mean entering a new industry at the top end of the technology chain rather than of the bottom, as has happened for instance in the semi-conductor industries in Taiwan and South Korea, but also more recently in Singapore and Malaysia (Mathews and Cho, 2000). On the consumption side satellite connections to wireless Internet-enabled devices could minimise or even eliminate the need for cable networks and expensive power-generating systems, a possibility for both the Philippines and Indonesia (Tipton, 2002). However, even in wealthy countries, the implications for many people have thus far been confined to doing what they have done, but possibly more efficiently, more frequently, or more flexibly. The internet has not revolutionised daily life (Wellman and Haythornthwaite, 2002). In developing countries, the potential revolution remains even further in the future. In rural areas of both China and Southeast Asia, electrical power and transmission systems are inadequate. Lack of education, poverty, and rigid social structures all work to prevent adoption and use of the new technologies (Tipton, 2002). There are several models of development of the electrical and electronics industry, and therefore several possible future scenarios for

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China and for Southeast Asia. The huge market enjoyed by United States firms is not easy to replicate. However, a more open system for the establishment of new firms would assist the sector in both China and Southeast Asia. The current difficulties of doing business could be lessened by changes in legislation and regulation (Hew and Nee, 2004). Direct government support can also play a role. The Taiwan government’s support of the semiconductor industry provided the basis for high technology firms, for instance, and the Korean government’s support of broadband access has deepened that country’s market for a broad range of electronics products. Although they compete in some areas, China and the countries of ASEAN have a range of interests in common – generally in opposition to the major global firms of Japan, Europe, and the United States – and therefore harmonisation of policies, multilateral collaboration, and common negotiating fronts could be low cost and high return policies. In light of the current dominance of major US, European and Japanese firms, it is conceivable that greater China-ASEAN collaboration in the electrical and electronics sectors could assist both – the resultant synergies could be greater than the sum of the parts. China and Singapore, at least, have significant investment capital, and as Chapter 3 in this volume demonstrates, each is also investing substantially in boosting research, including in their own key universities. A regional population of around 1.7 billion, a growing proportion of whom are now arguably middle class, provides an additional incentive for collaboration in the sector, offering a mass market for locally-designed and manufactured electrical and electronic goods, despite the ongoing challenge of market-seeking foreigners. Added to this, the China ASEAN Free Trade Framework Agreement, signed in 2002, came into effect in January 2010, forming the largest free trade area in terms of population and third largest in terms of nominal GDP. It is possible that China may take the lead in such joint ventures, since, as the chapter has indicated, high-tech products in both ASEAN countries are still largely foreign-owned. Significant growth in regional FDI, notably between Singapore and China (see Chapter 3 in the current volume) present further possibilities for collaboration in electronics and electrical industries, as does the relative weight of ethnic Chinese business leaders throughout the members states of ASEAN. The absence of leading technology acts as a brake, however, inhibiting the growth of both electrical and electronic industries in both ASEAN and China. Recent surveys of China’s innovation underlining more quantitative than qualitative improvement, are paralleled by some

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studies of innovation indices in SE Asia (OECD, 2008; Mohrmann and Wang, 2010; Welch, 2010). Regulatory barriers present a further hurdle, as indicated above, and lack of transparency can stymie both effective FDI and regional collaboration (Pritchard, 2005).

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262 The Impact of China on the Electrical and Electronics Industry in Southeast Asia Flextronics. Available at: http://www.flextronics.com. Forbes (2007) “Peter Tan”. Available at: http://www.Forbes.com. Freedman, C. (2006) “Free Trade or Free Trade Agreements?”, Macquarie University Centre for Japanese Studies, CJES Working Papers, 2006-1. Gareffi, G. (1993) “The Organization of Buyer-Driven Global Commodity Chains: How US Retail Networks Shape Overseas Production”, in Gareffi, G. and Korzeniewicz, M. (eds) Commodity Chains and Global Capitalism, pp. 95–122. Westport: Greenwood Press. Garnaut, R., Song, L., Yang, Y. and Wang, X. (2001) “Private Enterprise in China”, Canberra: Asian Pacific Press, and Beijing: China Center for Economic Research. (Some sections appeared in 2000 in International Finance Corporation, China’s Emerging Private Enterprise). Ghahremani, Y. (2001) “Heroes of the Digital Divide”. Available at: http://www. asiaweek.com/asiaweek/technology/article/0,8707,132165,00.html Gomez, E.T. and Jomo, K.S. (1997) Malaysia’s Political Economy: Politics, Patronage and Profits. Cambridge: Cambridge University Press. Haier Group. Available at: http://www.haier.com.cn. Hew, D. (2004) “SME Policies and SME Linkage Development in Singapore”, in Hew, D. and Nee, L.W., Entrepreneurship and SMEs in Southeast Asia, pp. 175–205. Singapore: Institute of Southeast Asian Studies. Hew, D. and Nee, L.W. (eds) (2004) Entrepreneurship and SMEs in Southeast Asia. Singapore: Institute of Southeast Asian Studies. Internet World Stats. Available at: www.internetworldstats.com/top20.htm (accessed 10 April 2010). Kaur, A. (ed.) (2004) Women Workers in Industrialising Asia: Costed, Not Valued. Houndmills: Palgrave Macmillan. Lee, T.Y. and Low, L. (1990) Local Entrepreneurship in Singapore: Private and State. Singapore: Times Academic Press. Lin, M., Zhu, R. and Hachigian, N. (2001) Beijing’s Business E-park – from http://www1.worldbank.org/publicsector/egov/zhongguancun_cs.htm. Liu, X., Parker, D., Vaidya, K. and Wei, Y. (2001) “Impact of Foreign Direct Investment on Productivity in China’s Electronics Industry”, International Business Review, 10(4): 421–439. Malaysia, MDC (Multimedia Development Corporation). Available at: www.mdc. my/index.html. Mathews, J.A. (2002) Dragon Multinational: A New Model for Global Growth. New York: Oxford University Press. Mathews, J.A. and Cho, D.S. (2000) Tiger Technology: The Creation of a Semiconductor Industry in East Asia. Cambridge: Cambridge University Press. McDonald, H. (2003) “Made in China”, Sydney Morning Herald, 18–19 October. McDonald, H. (2004) “Entrepreneur Seen as Guiding Light for China’s Neglected Farmers”, Sydney Morning Herald, 10–11 January. Mitchell, S. (2001) “Blueprint for Global Hi-Tech Hot Spot”, The Australian, 4 December. Mohrman, K and Wang, Y. (2010) “China’s Drive for World Class Universities”, in Portnoi, L., Rust, V. and Bagley, S. (eds) Higher Education Policy and the Global Competition Phenomenon, pp. 161–176. New York: Palgrave Macmillan. Morck, R., Yeung, B. and Zhao, M. (2008) “Perspectives on China’s Outward Foreign Direct Investment”, Journal of International Business Studies, 39(3): 337–350.

Frank Ben Tipton 263 Nationmaster.com Mobile Phone subscribers (most recent) by country. www. nationmaster.com/graph/med_mob_pho_submedia-mobile-phonesubscribers. Nolan, P., Sutherland, P. and Wu, Q. (2001) China and the Global Business Revolution. London and New York: Palgrave. Organisation for Economic Cooperation and Development (OECD) (2008) Reviews of Innovation: China. Paris: OECD. Painter, M. (2001) Public Sector Challenges and Government Reforms in South East Asia. Sydney: Research Institute for Asia and the Pacific. Panitchpakdi, S. and Clifford, M.L. (2002) China and the WTO: Changing China, Changing the World. Singapore: John Wiley & Sons (Asia). Pritchard, B. (ed.) (2005) The Regulation of Foreign Direct Investment: Southeast Asia at the Cross-roads. Research Institute for Asia and the Pacific (University of Sydney) for the Ministry of Finance (Japan), Sydney. Qadir, N. (2001) “Park Plan for Lagging IT Industry”, The Australian, 4 December, AFP report. Rugman, A.M. (2005) The Regional Multinationals: MNEs and Global Strategic Management. Cambridge, New York: Cambridge University Press. Ruigrok, W. and Van Tulder, R. (1995) The Logic of International Restructuring. London: Routledge. Sainsbury, M. (2004) “Cisco Feels Heat as Rivals Close In”, The Australian, 30 November. Sapura Holdings. Available at: http://www.sapura.com.my. Sargeson, S. (1999) Reworking China’s Proletariat. New York: St. Martin’s Press. Schein, E.H. (1996) Strategic Pragmatism: The Culture of Singapore’s Economic Development Board. Cambridge: MIT Press. Schumpeter, J.A. (1961[1934]) The Theory of Economic Development. New York: Oxford University Press. Searle, P. (1999) The Riddle of Malaysian Capitalism: Rent-seekers or Real Capitalists? Sydney: Allen & Unwin. SemIndia. Available at: http://www.semindia.com. Seno, A.A. (2000) “Creative’s Genius”, Asiaweek, vol. 26, no. 38. Shih, S. (2001) Growing Global: A Corporate Vision Masterclass. New York: John Wiley & Sons. Strach, P. and Everett, A. (2005) “Flextronics: The Ins and Outs of Foreign Direct Investment in Europe”, in Ramburuth, P. and Welch, C. (eds) Casebook in International Business: Australian and Asia-Pacific Perspectives, pp. 200–207. Frenchs Forest: Pearson Education Australia. Tim, L. and Dick, H. (eds) (2004) Corruption in Asia: Rethinking the Governance Paradigm. Annandale: Federation Press. Tipton, F.B. (2002) Alleviating the Digital Divide: Policy Recommendations – Malaysia, Thailand, The Philippines, Vietnam. Sydney: Research Institute for Asia and the Pacific. Tipton, F.B. (2005) “Matching Desires with Expectations: Southeast Asian Policies to Attract Foreign Investment”, in Pritchard, B. (ed.) The Regulation of Foreign Direct Investment: Southeast Asia at the Crossroads, pp. 139–154. Sydney: Research Institute for Asia and the Pacific (University of Sydney) for the Ministry of Finance (Japan).

264 The Impact of China on the Electrical and Electronics Industry in Southeast Asia Tipton, F.B. (2007) Asian Firms: History, Institutions, and Management. London: Edward Elgar. Tipton, F.B., Jarvis, D.S.L. and Welch, A.R. (2003) Re-defining the Borders Between Public and Private in Southeast Asia: Malaysia, Philippines, Vietnam, Thailand and Indonesia. Financial Sector, Telecommunications, Information and Communications Technologies, Higher Education. Sydney: Research Institute for Asia and the Pacific. Transparency International, Global Corruption Report (including corruption perception index and bribe payers index, annual). Available at: http://www. transparency.org. Tsai, K. (2002) Back-Alley Banking: Private Entrepreneurs in China. Ithaca: Cornell University Press. Wank, D.L. (1999) Commodifying Communism: Business, Trust and Politics in a Chinese City. Cambridge: Cambridge University Press. Wei, Y. and Liu, X. (2006) “Productivity Spillovers from R&D, Exports and FDI in China’s Manufacturing Sector”, Journal of International Business Studies, 37(4): 544–557. Welch, A.R. (2007) “Governance Issues in South East Asian Higher Education. Finance, Devolution and Transparency in the Global Era”, Asia Pacific Journal of Education, 27(3): 237–253. Welch, A.R. (2010) “Viet Nam, Malaysia and the Global Knowledge System”, in Portnoi, L., Rust, V. and Bagley, S. (eds) Higher Education Policy and the Global Competition Phenomenon, pp. 143–160. New York: Palgrave Macmillan. Wellman, B. and Haythornthwaite, C. (eds) (2002) The Internet in Everyday Life. Oxford: Blackwell. World Bank (2004) Doing Business 2004: Understanding Regulation. Washington, D.C.: World Bank and Oxford University Press. Xue, L. (1997) “Promoting Industrial R&D and High-Tech Development through Science Parks: The Taiwan Experience and Its Implications for Developing Countries”, International Journal of Technology Management, Special issue on R&D management, 13(7–8): 744–761. Yeung, H.W.C. (1999) “The Internationalization of Ethnic Chinese Business Firms from Southeast Asia: Strategies, Processes, and Competitive Advantage”, International Journal of Urban and Regional Research, 23(1): 88–102. Yeung, H.W.C. (2002) Entrepreneurship and the Internationalisation of Asian Firms. Cheltenham and Northampton: Edward Elgar. Yoshihara, K. (1988) The Rise of Ersatz Capitalism in South-East Asia. Singapore: Oxford University Press. Zeng, M. and Williamson, P.J. (2003) “The Hidden Dragons”, Harvard Business Review, October, 92–99. Zhang R. (2004) “Haier is the Sea”. Zhang’s speech was at http://www.haier. com/english/about/ceo.html, in September 2004, but was no longer on the site in early 2006. Zhu, R. (2001) Case Study – “Digital Park” Beijing Zhongguancun, E-Government in Developing Countries: Achievements and Prospects, conference sponsored by the World Bank, Washington D.C., 11–12 June. Available at: http://www1.worldbank.org/publicsector/egov/June01conference.htm.

8 Agricultural Biotechnology in China: Prospects for New Economy Industries in Southeast Asia Fredoun Ahmadi-Esfahani*

Introduction Concerns about agricultural productivity appear to have been a key motivation for China to actively participate in the development of biotechnology. The initial motivation was supply-driven with the aim of liberating price responsiveness and improving the availability of resources to production. Over time, however, the scope of the venture was broadened to incorporate demand-driven requirements and the emergence of market competition (Ahmadi-Esfahani and Locke, 1998). The key objectives of biotechnology programmes and polices, as defined by the Chinese government (Huang and Wang, 2002), are to: • • • • •

improve the nations’ food security; promote sustainable agricultural development; increase farmers’ income; improve the environment and human health; raise China’s competitive position in international agricultural markets along with other public agricultural programmes; and • create a modern market-responsive and internationally competitive biotechnology research and development (R&D) system in China. A number of strategies were recently developed to meet these objectives (Huang and Wang, 2002), including: • investment to enhance the innovative capacity (human and physical) of the national biotechnology research programme; *The research assistance of Moe Farida is gratefully acknowledged. 265

266 Agricultural Biotechnology in China

• a comprehensive publicly financed research system; and • creation of institutions and regulations to ensure heavy development of the technology that contributes to human welfare. This chapter traces China’s involvement in biotechnology development since the mid-1980s, and details the impact of animal and plant biotechnology in Southeast Asia. It argues that agricultural biotechnology in Southeast Asia is far less developed than that in China. Some background information is provided, followed by the investment behaviour of China and its Southeast Asian counterparts. The chapter then addresses the interaction between biotechnology and trade as well as issues associated with the role of public policy in the development of the biotechnology sector. Finally, the implications of the uneven development of biotechnology in China relative to Southeast Asia are explored.

Background The majority of the start-up companies in East Asian countries are still seeking viable business models. Asian investors remain uncomfortable with the long lead time inherent in biotechnology R&D, and are convinced about the viability of genomics companies in particular. The industry also suffers from relative inexperience within local financial houses. As yet, there are few experienced biotechnology analysts in Asian investment banks. Perhaps for these reasons there have been few initial public offerings of biotechnology companies in Asia, and none to date (with the exception of GeneMedix) in Singapore (Triendl and Yoon, 2001). Genomics may help propel the biotechnology sector to the forefront of the Asian region. Supporters of the genomics industry in Asia point to the past success of the information technology and semiconductor industry in the region, yet this is no guarantee of longterm success in biotechnology. Deoxyribonucleic acid (DNA) chips are not microchips, and the legal and regulatory infrastructure within almost all Asian countries is inadequate for dealing with the issues posed by recent advents in biotechnology and genomics. As the market for biotech products continues to expand, many organisations are helping to stimulate the industry by providing consultancy services, conducting contract research, and promoting the commercialisation of research results. In Thailand, for example, BIOTEC has undertaken a number of commercial ventures with overseas companies and taken the lead in setting up a number of joint ventures with the Thai

Fredoun Ahmadi-Esfahani 267

private sector (Tanticharoen, 1997). Moreover, Singapore succeeded in forging international linkages. Eighty multinational corporations are operating in the city-state, including Glaxo Wellcome, SmithKline Beecham, Becton Dickinson, Baxter, Schering Plough, Oculex, Corning Pharmaceutical (Phon, 2003). Glaxo donated $50 million to the Institute of Molecular and Cell Biology, the only example of a leading multinational corporation investing in an Asian basic research institute. Genelabs Diagnostics collaborated with the National University of Singapore on the research of various molecular approaches to identify and verify infectious agents. Eli and Company collaborated with the National University of Singapore and the National Science and Technology Board to set up Singapore’s first clinical pharmacology centre. The World Health Organisation (WHO) collaborated with the National University of Singapore to set up the WHO Immunology for the research on Hepatitis B diseases (Tang et al., 2003). Table 8.1 presents the estimated number of biotechnology-related ventures in Asia: Table 8.1

Estimated number of biotechnology-related ventures in Asia

Country China (Hong Kong) Japan India S. Korea Australia Taiwan Singapore Malaysia

Estimated number of biotechnology ventures 100 (50) 140 170 300 200 100 30 4

Source: Tang et al., 2003.

In addition to the international linkages, Singapore has already made more advances in agro-biotechnology. As of 1996, Singapore had captured about 80% of the premium niche market for orchids and about 20% of the mass orchid market. Wiltech Agro, a Singapore-based orchid grower, has set its aim to take 50% of the world market for orchids by franchising its concept of high-tech orchid farming in Singapore, Malaysia and Indonesia (Normile, 2002). On the other hand, Zhao (2003) investigated the biotechnology research institute’s commercialisation effort in response to economic reform in China, and proposed that market demand was not sufficient in bridging the gap between technological potential and commercial exploitation. Perhaps

268 Agricultural Biotechnology in China

the surest sign of the growth of China’s biotech industry is the change in entrepreneurial attitude within the academic community. In Taiwan, the local firms’ rise to prominence in aquaculture can be attributed to the fast and steady growth in production due to the several revolutionary breakthroughs that made use of conventional biotechnological studies (Liao and Chao, 2004). More important to the development of biotechnology in Asia are the contrasting consumer attitudes toward the sector. Asian consumer attitudes toward biotech food, for example, differ from European and North American consumers. Most consumers in China, for instance, lack the most basic understanding of biotechnology and its potential risk (Ho et al., 2006). This indicates the malleability of the Chinese consumer in a context of limited understanding and inadequate access to information. On the other hand, Tuan et al. (2005) employed a choice model to estimate the mean willingness to pay for biotech foods in China based on a large-scale consumer survey. They found that a majority – about 60% or higher – of respondents were willing to purchase biotech foods (e.g., soybean oil and rice) without any price discounts. To these consumers, biotech and non-biotech foods are perfectly substitutable. However, nearly 20% of respondents would not accept biotech foods (with the exception of neutraceutical biotech rice), regardless of any price discounts. The remaining 20% of respondents would purchase biotech foods only if price discounts were offered to them. Another study (Aerni et al., 1999) indicated that labelling of transgenic food products and allowing farmers free choice of seeds were important for gaining public confidence in Asia. Product labelling may have an effect on consumers’ acceptance, depending on the source and amount of information. While real consumer behaviour cannot be anticipated by the study, the survey indicated that consumer organisations had only a marginal stake in the debate and that health risks were not perceived as very serious among the respondents. Therefore, it was not anticipated that the average urban consumer in Asia would reject transgenic rice for fear of serious health risks. This can be considered as a major difference to opposition in industrialised countries. While stronger objection to genetic engineering in agriculture may not lead to stricter legislation, it might have consequences on the future strategies in development cooperation. It is likely that doubts about this technology, or lack of confidence in the responsible institutions, could lead to an increased polarisation in the debate which might hinder future cooperation among all the actors.

Fredoun Ahmadi-Esfahani 269

Investment in biotechnology: National comparisons China In East Asia, funding support and execution of agricultural biotechnology research is generally highly dependent on the public sector. In 1986, the China New Technology Venture Capital Company launched China’s venture capital (VC) industry. Today there are over 200 VC companies (above $4.8 billion in capital mostly from government-related agencies), with investment in biotechnology at about 8.5% (68 projects, ranking biotechnology in the top five out of 18 sectors, as defined by China’s VC Yearbook 2002). In addition, most biotech research in China has been government funded. During the 1990s, China’s investment in plant biotechnology rose at a significant rate. Between 1995 and 1999, biotech spending almost tripled from the equivalent of US$40 million to US$112 million, and China announced plans to increase research budgets 400% over the next five years (Huang et al., 2001). Biotech research in animal and plant agriculture combined is estimated to account for 15% of China’s agricultural research, much higher than the 2–5% share typically devoted to biotech research in developing countries. Investment in public-sector biotechnology research has risen dramatically to US$1.2 billion for 2001–2005, a 400% increase over 1996–2000 levels, with about US$120 million allocated for transgenic rice R&D (Gale et al., 2002). With field testing of various transgenic rices in progress since 1998, and with an additional 53 ha planted in 2003, China is poised to become the first country in the world to commercialise transgenic rice (Chervenak, 2006). Indeed, China now accounts for an estimated 10% of the world’s public expenditures on agricultural research and development (Parthasarathy, 2003), ranking second to the US in terms of research funding to agriculture biotechnology, with an estimated US$112 million invested in 1999 (Hautea, 2004). China’s public agricultural research system is thus poised to play a dominant role in the global biotechnology sector; already, for example, it is the largest in the world in terms of research personnel with more than 400 universities, research institutes and companies, employing more than 130,000 persons (Huang et al., 2001). Tables 8.2 and 8.3 provide an indication of the plant biotechnology research budget by source, and the number and composition of plant biotechnology research staff in selected institutes in China.

270

Table 8.2

China’s plant biotechnology research budget by source in the sampled institutes, 1986–1999 By source

Year

Core

Project

Equipment

Commerce

Consultant

Contract

Donors

Others

Total

0.0 0.0 0.0 0.1 1.1

1.5 2.1 2.6 6.9 7.6

0.0 0.0 1.5 2.0 3.3

16.0 27.7 32.7 92.8 130.8

0 0 0 0.1 0.8

9 8 8 7 6

0 0 5 2 3

100 100 100 100 100

Million RMB yuan in 1999 price 1986 1990 1995 1999 1999a

4.2 4.1 4.8 14.4 19.4

5.4 13.3 20.3 60.0 86.9

4.9 8.1 3.3 8.1 10.9

0.0 0.0 0.1 0.3 0.3

0.0 0.0 0.0 1.0 1.3 Composition (%)

1986 1990 1995 1999 1999a

26 15 15 16 15

34 48 62 65 66

31 29 10 9 8

0 0 0.3 0.3 0.3

0 0 0 1.1 1.0

Research budget by institute and university in 1999a University Research institute

2.4 17.0

Note: See note to Table 8.3. Source: Huang et al., 2001.

29.4 57.5

2.6 8.2

0.2 0.2

0.0 1.2

0.0 1.1

0.8 6.9

1.3 2.0

36.7 94.1

Fredoun Ahmadi-Esfahani 271 Table 8.3 Numbers and composition of plant biotechnology research staff in the sampled institutes in China, 1986–1999 Professional staff Year

Management

Research

Support staff Subtotal

Technical

Subtotal

Total staff

276 301 322 381 455

356 399 433 514 688

641 808 968 1,205 1,657

43 37 33 32 27

56 49 45 43 42

100 100 100 100 100

Other

Staff number 1986 1990 1995 1999 1999a

82 114 164 207 264

203 295 371 484 705

285 409 535 691 969

80 98 111 133 233

Composition (%) 1986 1990 1995 1999 1999a

13 14 17 17 16

32 37 38 40 43

44 51 55 57 58

12 12 11 11 14

Staff number by institute and university in 1999a University Research institute

52 212

72 633

124 845

15 218

27 428

42 646

166 1,491

Note: All data are from 22 biotechnology research institutes except for those associated with 1999a that includes 20 institutions in 1999. These 20 institutes account for about 80% of research staff about 85% of research expenditure, and more than 90% of research output in China’s plant biotechnology. Source: Author’s survey.

Taiwan China is not alone in Asia in pursuing biotechnology R&D. In Taiwan, for example, the government has taken several concrete steps to promote the biotechnology and pharmaceutical industries, including strengthening basic research and putting in place measures to support commercialisation effort, assisting with export promotion and export credits for biotech companies introducing technologies to international markets, formulating suitable laws for all categories of biotech products, promoting a system of international mutual accreditation to open-up international markets, and promoting large-scale investment.

272 Agricultural Biotechnology in China

The Executive Yuan (Taiwanese Congress) has also formed a Development Fund with two programmes to provide capital to the biotech industry. The first programme was to invest up to $579 million over the period from 1998 to 2005 in start-ups, expansion projects by large biotech companies, and VC companies focused on the industry. The second programme combines both government and private investment. Its objective is to provide $2.9 billion in capital for VC companies, to improve the current investment environment and develop VC investment enterprises. The Development Fund is responsible for 30% of the capital, while the private sector provides the remaining 70%. Consequently, investment in R&D grew by 29% in 2001 and 46% in 2002, respectively, and appears to be on a continued upward trajectory. R&D in biotechnology accounted for 29% of the total national R&D budget in 2002, demonstrating the government’s substantial commitment to the sector (Su, 2003). The majority of basic research is carried out at universities and at the Academia Sinica, and is supported by that organisation as well as the National Science Council and the Ministry of Education. Mid-stage research is supported by the Council of Agriculture, Ministry of Economic Affairs, Department of Health, Atomic Energy Council and Ministry of National Defence. This research has developed technologies related to gene cloning, protein expression, diagnostics and therapeutics (Hautea, 2004). Malaysia Further afield in Southeast Asia, Malaysia launched the BioValley in May 2003, known as the country’s flagship science project, costing US$160 million and aimed at attracting biotech companies to a centralised hub in Southeast Asia. At the core of the BioValley will be three institutes: the Institute for Genomics and Molecular Biology, the Institute for Agro Biotechnology and the Institute for Pharmaceutical and Neutraceutical Biotechnology. Approved under the current Eighth Malaysia Plan, the institutes will exploit the economic potential presented by the biotech sector by incubating innovative research, training scientists, and supporting nascent biotechnology companies. Malaysia Venture Capital Management Berhad has invested US$16.4 million in four biotech companies so far, representing a quantum leap in total VC investment in the sector. However, to realise the full potential of biotechnology, significant financial input must continue to be channelled into the sector to foster commercial activities and wealth (Cyranoski, 2005).

Fredoun Ahmadi-Esfahani 273

Singapore Singapore, in contrast, is betting that a US$2 billion initiative will create the talent pool and business climate necessary for a world-class biomedical enterprise. Excellent infrastructure, a skilled workforce and strong intellectual property policies have attracted many leading pharmaceutical companies to Singapore. Companies with state-of-the-art global manufacturing activities include Aventis, GlaxoSmithKline, Merck, Pfizer, Schering Plough, Wyeth, BD, Baxter and Siemens (Normile, 2002). Since 1991, the Economic Development Board made a gradual shift from building infrastructure for research to strengthening the biotechnology industry and the commercialisation of R&D. It set up a venture capital company, Singapore Biotech Pte Ltd (of US$20 million in capital), to enhance the commercialisation of indigenous inventions and to make investment in viable biotech projects both locally and abroad. It has already made investments in 15 firms from Asia, the UK and the US. It also established a subsidiary in the US to tap the advanced biotechnological knowledge (Chaturvedi, 2002). The subsidiary identified a market niche of a vaccine against Hepatitis B (an endemic disease in Asia), and ventured into a licensing and marketing agreement with a US start-up biotechnology company, to bring the vaccine to the Asian market. The Economic Development Board has provided generous tax and financial incentives to both local and foreign firms. A number of companies have set up R&D, clinical trials and manufacturing in Singapore, and used Singapore as a stepping stone to penetrate the Asia-Pacific market including China (Tsui-Auch, 1999). Thailand In the past, the development of bioindustries in Thailand has been impeded by a lack of confidence in biotechnology among private investors. With burgeoning opportunities for biotech products in Thailand, however, various forms of financial support are becoming available, including VC and low-interest loans. The government has contributed several initiatives, such as the National Science and Technology Development Agency (NSTDA)’s Company Directed Technology Development Programme, Innovation Development Fund, and NSTDA Investment Centre, and the Invigoration Thai Business Programme of the Department of Industrial Promotion. At the same time, private financiers have become increasingly interested in investing in biotechnology. For example, Small Industry Finance Corporation (SIFC) offers loans for small industries. Thailand established the National Centre for

274 Agricultural Biotechnology in China

Genetic Engineering and Biotechnology (BIOTEC) in 1983 (Redona, 2004). BIOTEC has supported biotechnology R&D in six areas, including the improvement of disease resistance in rice, particularly against rice blast. In 1999, BIOTEC also provided US$3.7 million to fund the “Rice Genome Project Thailand” (Tanticharoen, 1997). Most rice-growing countries in Asia, with the exception of China and India (Redona, 2004), however, have yet to launch similarly focused government initiatives on rice biotechnology R&D. Viet Nam The Vietnamese government released a detailed 15-year plan for national biotech development at the end of 2004, anticipating the country’s emphasis to shift to the production of pharmaceutical products, diagnostic tools, and vaccines. By contrast, however, agricultural biotechnology in Southeast Asia is far less developed than that in China, and the country needs more capital and human resources to truly stand out among its Southeast Asian neighbours. Vietnamese biotechnology currently focuses on agriculture, animal husbandry and tropical organisms – research areas that were expanded in 2004 with the establishment of five national biotech research centres, which were to be completed by 2007. The government gave each institute between US$3 million and US$3.5 million in seed money, according to Binh Le Tran, the Director of the Institute of Biotechnology (IBT) in Ha Noi (Liu, 2004). The centres were to use buildings and staff from existing institutes so that most of the money could pay for new equipment. In addition to establishing the five centres, in late 2003 the government approved US$400 million for biotech research for 2003–2010. Le Tran expects that the Vietnamese government’s 15-year plan will increase federal investment in biotech by 15%. But some significant obstacles stand in the way of Viet Nam’s biotech development, such as the lack of skilled human resources, according to Philippe Scholtes, the representative for the United Nations Industrial Development Organisation in Ha Noi (Liu, 2004). Pan Asian collaboration As indicated previously, current modalities of public-private sector partnerships include joint ventures in R&D with equal sharing in costs and returns on investment; knowledge sharing; technology transfer; and outright donation of the technology by private firms to national public research institutes. Examples of collaborative crop improvement projects in Asia include the Papaya Biotechnology Network and the

Fredoun Ahmadi-Esfahani 275

Rice Genome Sequencing Project. The Papaya Network is a collaborative undertaking of five Asian countries Indonesia, Malaysia, Thailand, the Philippines, and Viet Nam in developing transgenic papaya resistant to papaya ring spot virus and improved shelf life. The Rice Genome Project is a research consortium of national research agencies from ten countries, seven are from Asia, and a private company involved in rice gene mapping. Table 8.4 details the key institutions involved in crop biotechnology R&D across selected East Asian countries: Table 8.4 Crop biotechnology research and development in selected East Asian countries Country

Key Institutions

Crops

China

Institute of Biotechnology Research, Chinese Academy of Agricultural Science, China National Centre for Biotechnology Development

Rice, cotton, maize, wheat, and vegetables

Indonesia

Agency for Agricultural Research and Development, Centre for Biotechnology Research and Development

Rice, cassava, maize, cotton, and soybean

Malaysia

National Biotechnology Directorate, Ministry of Science, Technology and the Environment

Rice, papaya, orchid, chilli, rubber, and palm oil

Philippines

National Institute of Molecular Biology and Biotechnology

Rice, maize, coconut, mango, banana, and papaya

Thailand

National Centre for Genetic Engineering and Biotechnology

Rice, maize, cotton, cassava, durian, rubber, tomato, and orchid

Viet Nam

Institute of Biotechnology, National Centre of Natural Sciences and Technology

Rice, maize, potato, sweet potato, cassava, soybean, sugarcane, and cotton

Source: Hautea, 2004.

Biotechnology and trade The global market for biotechnology and biotech products has grown rapidly in the last few years. In 1995, the international transactions in biotech products totalled US$75 million. By contrast, agricultural

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biotechnology in Southeast Asia is far less developed than that in China, and by 2005 exceeded US$6 billion (World Bank, 2006). This period has also seen a rapid rise in acquisition, alliances and mergers. There are several factors responsible for these initiatives. Huang et al. (2001) suggests that firms having higher profits in pharmaceuticals/ biotechnology are now entering the agricultural sector. In the period 1995–1998, for example, there were 25 major acquisitions and alliances valued at some US$17 billion. These growth patterns are likely to increase as technology advances. However, commercial applications of these technologies are not yet widely available and the evolving regulatory environment governing the sector poses challenges and potential obstacles as well as externalities that will likely impact on profitability in the sector and thus future roll out and commercialisation of biotechnology products. The Cartagena Protocol (signed by 107 states and regional economic integration organisations) and National Regulatory Regimes in Agricultural Biotechnology, for example, constitute two broad sets of evolving regulatory regimes. The Cartagena Protocol, in particular, is a Multilateral Environmental Agreement (MEA) on biosafety that, at its core, attempts to strike a balance between trade interests in biotechnology and protection of biological diversity. Together with nationallybased regulatory protocols, the commercial implications for biotechnology projects appear to be vexed. As the global debate over the benefits and safety of genetically modified (GM) food rages on, for example, China has passed regulations that require clearer labelling of these types of products and is now entertaining calls for the imposition of mandatory food labelling. More generally, since China’s State Council considered and passed Regulations Concerning the Biotech Safety Management of Agricultural Gene Alteration (BSMAGA) (Chaturvedi, 2001), there is clear evidence that, notwithstanding some ongoing problems, China is moving toward a more proactive regulatory environment. In part, the introduction of new regulatory standards such as the BSMAGA reflect attempts by the Chinese authorities to correct regulatory oversights and inconsistencies. In the past, for example, when crops with genetic alterations graduated from the laboratory to the field, they had to be approved by the Ministry of Agriculture. However, when they were transformed into merchandise, there were no such regulations. The new legislation is thus designed to regulate biological products with gene alterations requiring food labelling so that issues related to gene alteration can meet international standards.

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The implications of these evolving regulatory protocols are yet to be fully determined in terms of their impact on biotechnology R&D and commercialisation opportunities. Obviously, however, in the case of China they represent a fine balancing act. Huang et al. (2004), for example, using a Global Trade Analysis Project (GTAP) model, found that the development of biotechnology had a positive and pronounced impact on China’s production, trade and welfare, with the welfare gains far outweighing public biotechnology research expenditure. Regulatory protocols that hinder this welfare impact thus pose potential dangers for the continued roll out of the biotechnology sector in China in the coming decades. GMOs and the evolving global regulatory order The issue of GM organisms “GMOs” possibly span several World Trade Organisation (WTO) Agreements, including Agriculture, Trade-related Aspects of Intellectual Property Rights (TRIPs) and Technical Barriers to Trade (TBT). The GMO-related issues have also been discussed in the Committee on Trade and Environment (CTE). Most of the discussion on the subject has been in the TBT Committee with the focus being on labelling regulations. The problem, of course, is that with a multiplicity of institutional forums addressing regulatory standards and codes as they relate to biotechnology products, confusion might well give way to regulatory dilution, particularly in a context of a rapidly evolving sector where innovation and commercialisation proceeds at an accelerating pace. Not surprisingly, during their most recent negotiations, some members called for clarity in the WTO rules as applied to products of new technologies in part to help solidify the regulatory regime governing the sector. This problem is magnified by the scale at which biotechnology modified crops are being dispersed. Governments throughout the world must consider how to more effectively regulate production and trade in GM crops if the sector is to be nurtured and appropriate review and safety protocols standardised. Indeed, even with the successful conclusion of the Cartagena Protocol negotiations, there is not a comprehensive regulatory system to manage the environmental risks of GMOs. Rather, confusion, distrust and anxiety surrounding GM products tends to dominate, such that even if governments provide open access to markets for GM products, many consumers may simply refuse to purchase them. There is thus an obvious need for consumer and citizen concerns to be addressed at both the international and domestic levels.

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While some progress has been made with the proposed development of a global Biosafety Protocol, internationally comprehensive approaches such as this are difficult to conclude in one fell swoop. More likely is the case that the WTO’s Dispute Settlement Body may be asked to deal with the issue of trade in GM products and thereby conclude part of the international regulatory puzzle. However, the international trade regime and the WTO specifically has yet to address fully the challenges stemming from advancements in biotechnology. As a consequence, governments in Asia and elsewhere have reacted to consumer concerns and civil society activities by imposing prohibitive measures which are already impacting global trade in specific biotechnology and GMO products. Without a more definitive series of global regulatory protocols, Asia like the rest of the world will find it difficult to balance the competing demands to curb GM products while supporting the growth of a potentially lucrative and significant growth sector of their economies (Tanasugarn, 2002). Getting the regulatory framework right for trade in GM products is also essential in terms of the broader, and perhaps more significant, issue of fostering investment in the sector. International market access can be restricted in two ways: the imposition of trade barriers and IP piracy. Studies by Gaisford (2002), for example, which modelled an enforcement game between a developing country government and a foreign biotechnology firm in order to examine the efficacy of the WTO and TRIPS Agreements for the protection of intellectual property in agricultural biotechnology, produced a series of potentially worrying findings. Gaisford concluded that TRIPS was unlikely to provide sufficient protection and thus would lead to suboptimal levels of investment necessary to support the biotechnology sector. The sustainability of the biotechnology sector in China and Asia generally might thus rest in the rectitude of the regulatory framework that emerges at the domestic, regional and international level. Governments throughout Southeast Asia have recognised this for some time. Indeed, in 2004 officials from nine ASEAN governments as well as representatives from the United Nations University Institute of Advanced Studies (UNU-IAS), the ASEAN Secretariat and the Japan Bioindustry Association, explored the interrelationships between different trade and environmental agreements and IP protocols in an attempt to map their implications for the management of the biotechnology sector. Yet, despite general agreement to focus on activities and modalities to promote a more integrated response to trade, biotechnology and sustainable development challenges, coordination

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and implementation issues remain a core and as yet unresolved challenge. Despite such challenges, intra-Asian collaboration in developing biotechnology sectors remains in evidence and appears to be deepening. Noteworthy, for example, is the initiative by the Tokyo-based pharmaceutical firm Gene Networks International (GNI) and its announced merger with Shanghai Genomics in June 2005, marking this the first such partnership between a Japanese and a Chinese biotech firm in over a decade. The newly formed venture has more than 80 research staff in Japan, China and England, and a portfolio of drugs in preclinical and early-stage clinical development. GNI simultaneously announced that it had raised an additional $13 million from private equity sources including Japanese heavyweight Nomura Research & Advisory (NR&A). The deal is emblematic of a deepening level of Asian collaboration and movement toward consolidation in the sector after several successful collaborative endeavours. The GNI and Shanghai Genomics merger, for example, emerged from a successful collaboration between the two companies in which GNI had turned to Shanghai for wet laboratory validation of its proprietary gene regulatory network technology (Hautea, 2004). Armed with this platform for predicting genome-wide effects of disturbance in gene regulation, the combined companies now aim to capitalise on the speed and cost efficiency of drug development in China, both in bringing agents developed by the two parties to market and in contract research, which will continue to be branded as a Shanghai Genomics service. To what extent such ventures represent a sustainable model for biotechnology in Asia remains problematic, however. While few now question the cost advantages of locating in China and the positive externalities in terms of access to large patient populations for clinical trials and early penetration into a huge, rapidly growing market, concerns persist about compliance, enforcement and knowledge transfer issues. Indeed, despite great advances in getting good practice standards signed into law, intellectual property issues and enforcement remain problematic as do issues surrounding informed consent and clinical trials which continue to nag the nascent industry (Zhao, 2003). There are also concerns about knowledge transfer and the generalisable nature of data gathered in China in terms of its suitability for export to the rest of the world; an issue that remains a potential major stumbling block. Despite this, however, companies like GNI are eyeing the increasingly well-to-do Chinese coastal populations that constitute a potential

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market of more than 100 million people whose ability to afford highend healthcare is expanding rapidly. GNI, for example, sees niche Asian health issues providing a growing market segment and is thus targeting diseases more prevalent among East Asian populations such as hepatitis B and hepatitis C as well as some forms of cancer. In doing so, GNI hopes to identify potentially underserved groups in both Japan and China and uses this as a basis for organic growth in the sector. More broadly, economic growth in Asia and an emerging middle class with higher disposable incomes will likely see similar ventures sprout up throughout the region. By one estimate, for example, the sheer size of the Asian healthcare sector now accounts for 30% of all the new healthcare expenses globally (Chervenak, 2006).

Biotechnology and public policy As noted earlier, the Chinese government views agricultural biotechnology as a tool to help China improve the nation’s food security, raise agricultural productivity, increase farmer’s income, foster sustainable development and improve its competitive position in international agricultural markets. An additional objective of China’s technology policy is to pursue a leadership position in biotechnology development. With these objectives in mind, China implemented a formal government policy toward biotechnology and initiated ambitious research programmes beginning in the mid-1980s (Anderson and Yao, 2001). Substantial investments in modern biotechnology R&D speak well of the high priority given by Chinese authorities to biotechnology. Public sector funding to support agricultural biotechnology continues pouring in at levels in excess of funds granted over the past ten years. The government has developed centres such as the Beida Biotechnology Park, Hangzhou Biotechnology Park, Zhongguancun Science Park and Hong Kong Science Park to foster the growth of start-ups with technology spun out of universities as well as scientists returning from overseas to set up their companies using offshore capital (Huang and Wang, 2002). Moreover, public research institutes are reported to have developed 141 GM crops, 45 of which have been approved for field trials, 65 for environmental release, and 31 for commercialisation (Huang et al., 2001). Table 8.5 summarises the number of genetically modified plants approved in China through 1999. While China’s resource capacity has allowed for massive investment into the biotechnology sector, the high up-front costs of software, hardware, technical maintenance and systems support, create considerable

Fredoun Ahmadi-Esfahani 281 Table 8.5

Number of GM plants approved in China through 1999 In trials or awaiting commercialisation

Crop Cotton Rice Wheat Corn Soybean Potato Rapeseed Tobacco1 Peanut Cabbage Tomato Sweet pepper Petunia Other

Commercialised

Number of varieties 13 16 1 2 2 8 2 4 1 1 5 2 2 6

2 0 0 0 0 0 0 1 0 0 1 1 1 0

1

Insect-resistant tobacco was commercialised in 1992 but stopped in the mid-1990s for trade reasons. Source: Huang et al., 2001.

barriers to entry for many other Asian countries. There remains a considerable resource gap among many Asian and Southeast Asian countries whose ability to fully realise their biotech potential either academically or economically is constrained by underdeveloped bioinformatics as a supporting technology platform to co-foster development with, for example, molecular biology-oriented research programmes. Various Asian states have recognised this problem. Malaysia, for example, took steps to develop an infrastructure for bioinformatics to support national priorities in biotech research agendas, particularly government initiatives in genomics and proteomics, by setting up NBBnet – The National Biotechnology and Bioinformatics network (Raih et al., 2003). One of the thrusts under the Ninth Malaysia Plan is the creation of regulatory framework to facilitate the build up of strong and diversified biotechnology industry (Jusoh, 2006). Indonesia too has followed a similar policy agenda. Recognising the potential role of biotechnology in maintaining a sustainable agriculture production, Indonesia started to place a high priority on biotechnology since 1988 as one of the strategic technologies. Biotechnology has thus become one of the priorities of the National Science and Technology

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Development Programme. The Ministry of State for Science and Technology established the National Committee on Biotechnology, which is responsible in preparing and formulating a national biotechnology policy and development programme to assist national development (Chapman et al., 2003). The committee also gives guidance and encouragement in the development of bio-industry and in supporting R&D and human resources. It also provides directions for the establishment of national, regional, and international networks to foster research and commercialisation collaboration and monitors the implementation of the national policy on biotechnology (Sukara and SlametLoedin, 2000). Similar strategies, albeit more comprehensive in nature, have been implemented in Singapore, where the Biomedical Science Group of the Singapore Economic Development Board (EDB), and the Biomedical Research Council of the Agency for Science, Technology and Research (A*STAR), coordinate a suite of policy architectures that directly fund and supports public research initiatives as well as promotes public awareness of science and technology. Singapore has also demonstrated an integrated R&D programme that extends to start-up subsidies. Companies setting up R&D, manufacturing or locating regional headquarter in Singapore, for instance, can seek tax and financial incentives from EDB’s Biomedical Sciences Group (Tang et al., 2003). More recently, as part of its industrial clustering strategy, Singapore has embarked on the ambitious goal of developing biomedical sciences as an industry (Phon, 2003). Singapore has encouraged the growth of new local biotechnology enterprises through programmes such as the Biomedical Sciences Innovate ‘N Create Scheme (BMS INC), launched in 2002. Companies that qualify receive up to $1.1 million as seed capital toward the execution of their business plans. Furthermore, the government contributed substantial financial support for the establishment of centres of excellence. The Economic Development Board has offered over US$100 million to the sector through the funding of the Institute of Molecular and Cell Biology (IMCB) (Lee and Ngiam, 1994), which was set up in 1987, hosting 161 research scientists and engineers as of 1995, with 66% holding PhDs and many recruited from western countries, working on a hundred projects on cell regulation, molecular neurobiology, plant genetic engineering, tumour virology, and immunology. As a result, the IMCB has established three spin-off companies to commercialise its research: (1) Gene Singapore for the development and marketing of human healthcare products for the Asian market, (2) GeneSing China for the development of biotech products for the

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China market, and (3) TetGen for the development of technologies for novel plants and produce. Singapore’s proactive policy architecture and industrial clustering strategy toward biotechnology, however, is far from the norm in Southeast Asia. The Philippines, by contrast, displays a less than integrated or consistent approach to biotechnology promotion despite being the first country in ASEAN (Association of Southeast Asian Nations) to have in place guidelines for biotechnology R&D. Yet, even with the codification of a formal policy framework, the Philippines has not developed institutional mechanisms to support implementation of the guidelines by way of establishing the appropriate facilities required for research, nor has it developed institutional systems for the application of risk measurement and management systems in terms of biosafety research (Halos, 2000). Likewise, no guidelines for the commercialisation of biotech products exist. In addition, the lack of a commercial base remains a key constraint impinging on the development of agricultural biotechnology in the Philippines (Padolina, 2000). Perhaps more fundamentally for the Philippines, however, is the emergence of robust civil society groups whose concern with the safety of biotechnology products has led to demands for them to be banned. In 2005–2006, for example, bills were presented to the Philippines Senate calling for the banning of GMOs in response to concerns raised in Europe and on the grounds that the Philippines lacked the appropriate regulatory framework for biotech products (Mimier, 2004).

Discussion In Asia as elsewhere much of the debate surrounding biotechnology is contested. Scientific debate is interspersed by ethical and moral debates concerning the efficacy of research and funding into biotechnology and fears over the safety implications of the technologies being developed. Unlike in Europe, however, Asia also has to contend with an environment with wide variation in the institutional capacities of national regulatory systems to manage effectively nascent industries and the biosafety issues that arise. The risk management systems, institutional capacities, knowledge base, funding and financial resources, as well as the execution and implementation capacities of national organisations vary widely between Asian states. In the case of biotechnology where the institutional environment remains paramount to the sector’s long-term sustainability, it is thus highly likely that diversity rather than congruence will mark the evolution of the sector in Asia

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over the coming decades. Discussions about biotechnology in Asia thus have to be contextualised amid the environments in which they are being nurtured and, importantly, the specific biotechnology applications that are being exploited. Not all biotechnologies are equal in terms of complexity or potential biosafety hazard. The means of assessing risk, of evaluating the costs and potential benefits of the technologies, and of their net value to the economies in which they are situated, needs to be addressed perhaps not in absolute terms but relative ones in relation to the institutional environments in which these technologies are being developed. Conventional cost-benefit analyses, for example, ignore both the unique characteristics of the technology and leave out a range of issues that are not captured by such techniques (Parthasarathy, 2003). As North (1990) puts it, what we need to look at in relation to how people manage their resources is not “allocative efficiency”, but “adaptive efficiency”. Given the state of pervasive uncertainty under which individuals live, particularly in developing countries, decisionmaking in the face of risk cannot be done on the basis of probability distribution of possible outcomes. An emphasis on flexibility, adaptive capacity and choice is required, as well as on education and learning, on developing new technologies and practices, on adapting social relations and institutions, on changing consumption and investment practices, and on evolving appropriate policy mechanisms as required. Transgenic varieties and products of biotechnology imply differences in management and cultivation that require increased knowledge, and, therefore, their benefits can be derived only in the context of learning and skill development. But learning and skill development can occur only when technology design has the capacity to promote them, not when technology development costs are extremely high or so complex that they can be carried out only in sophisticated laboratories (Manicad, 1995). Getting this mix right is thus essential if the right biotechnologies are to be nurtured in the appropriate setting and environment. This has important implications for the development of the biotechnology sector in Asia and, indeed, implies a change of policy thinking if the sector is to be sustained. Consensus statements on agricultural biotechnology which simply attempt to change policies to involve the public sector; or to provide institutional support (credit) for new technologies, will not necessarily enhance the ability to cope under conditions of uncertainty. The ability to innovate is a more important form of capital than finance, and policy support rather than simple concepts such as “institutional reform” is required. Merely training

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agricultural extension agents, for example, may not be adequate (Louet, 2004). To repeat an earlier point, the issue is not one of technology transfer and training, but rather if we are to provide farmers with the long-term ability to cope with uncertainties and risk of using technology as a mechanism, then the policy architecture needs to be in place to nurture and sustain such endeavours. Bourdieu’s (1984) concept of “cultural capital” may be appropriate here. Knowledge and skills pertaining to natural resource management and agriculture have historically been a part of the repertoire of symbolic and cultural capital. In Bourdieu’s (1984) view, cultural capital includes the full range of a society’s symbolic resources comprising norms and values, and religious, philosophical, artistic and scientific understandings that frame and interpret reality and enable individuals to act upon it. These understandings become a part of an individual’s personality and constitute the habitus defined as “socially acquired, embodied systems of dispositions and/or predispositions”, which bestow “deep structural” classificatory and assessment propensities” to individuals. Perceiving subjects through these principles “have a world of common sense”, which means that technology and skills are akin to the nature of farmers eking out livelihoods from natural resources. There is a world of difference between an approach which works on the basis of transfer of technology from experts via extension agents to end users, and an approach that allows end users to participate in and develop technological solutions to problems themselves. For biotechnology to provide appropriate solutions, we need to promote those tools which will eventually be a part of the individual or society’s cultural and symbolic capital as well as an aspect of individual or class habitus. This approach has the advantage of effecting technology dissemination in that habits actually spread faster than knowledge (Parthasarathy, 2003). Taking the example of the impact of the introduction of new crop varieties on biodiversity loss and common property resources, it has been pointed out that events or conditions occurring at a particular position in environmental space lead to consequences elsewhere in environmental space (Redona and Mula, 2004). Economics provides only a very incomplete perspective on the unknown value of biodiversity changes. Changes in biodiversity affecting commonly used resources have not been well documented – but are not unknown. Studies have shown that genetic diversity of crops plays a very important role in increasing yield stability. Unfortunately, the consequences of adopting new technologies for both ecological and economic

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systems appear not to be well investigated and the risks not well quantified. Environmental impacts as well as negative impacts on societies and economies do not enter the calculus of assessments of these technologies. In fact, most studies focus only on economic costs and benefits at the individual farm level rather than the broader community or societal level (Pray et al., 2001). Managing these issues effectively requires a variety of policy and institutional mechanisms reflecting the specific needs and capacities of Asia’s diverse nation-states. There is, however, evidence of adaptation and policy/institutional innovation around Asia that potentially suggests a promising future for the biotechnology sector. Southeast Asian countries, for example, have attempted to develop their own incubator strategies which potentially serve as models for other countries to experiment within their own contexts. Singapore, for example, has evolved a highly successful model built on attracting international biotech businesses by providing high-grade infrastructure plus grant and loan incentives. The Indonesian model, by contrast, has been to establish Tech Transfer Offices (the so-called “IPR Centres”) in each biotech research institute and university as a means of organically infusing primary research into the existing talent banks in the country. The Filipino and Thai models of having specialised biodiversity regulations and standardised Material Transfer Agreements (MTAs) has likewise provided innovative mechanisms for undergirding biotechnology IP protection and enhancement. Last but not least, the Malaysian model of putting IP and biotechnology as an incubator industrial cluster in its “Ninth Malaysian Plan” should be carefully studied by all developing countries as a mechanism for providing a critical mass in terms of an “all of government” approach.

Future prospects for biotechnology in Asia The future of the biotechnology sector in Asia thus reveals not so much an integrated sector as a series of discrete sectors whose prospects and fortunes are as varied as the region. In Singapore, for example, one of Southeast Asia’s most successful economies, past successes in information technology and communications do not necessarily guarantee success in the biotechnology sector. Despite building world class facilities and allied infrastructure to support scientific research, creating an environment that proves attractive to foreign nationals to make their home in Singapore and the place in which to grow their research careers, betrays the difficulties that lay ahead. Attracting and retaining

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highly-skilled talent requires more than research infrastructure and Singapore, more than most nation-states, understands the difficulty of talent retention and the problem of a domestic “brain drain”. The biotechnology sector in Singapore is thus still embryonic, and those biotechnology companies that have been created still have much road to travel before the Singapore biotechnology story can be labelled a success (Cohen, 2001). In Indonesia, government support and policy innovation remain relatively strong but funding for the sector is scarce (albeit growing) and an all-of-government planning model needed to help support and nurture the sector is little in evidence. More alarmingly, the needed infrastructure roll out to help grow the university sector and public research institutes, and the resource allocation to support clusters of excellence in biotechnology, appear to be short on the ground. While Indonesia is emerging in positive ways from a decade long period of restructuring in the wake of the Asian financial crisis of 1997, this has also proven a decade of neglect for the biotechnology sector, the longer-term consequences of which has delayed consolidation in the sector. Perhaps the only advantage of the past ten years of experience is that it has been possible to identify the strengths of its biotechnology capability (Lipton, 1999). Various research clusters and groups within the country have been and are being formed. And awareness of the potential of the biotechnology sector in an economy that is still dominated by agriculture production, has grown. Indeed, with the appreciation of the value of crops like palm oil, for example, interest in the sector in terms of potential commercial applications and spin-offs are in growing evidence. Indonesia’s experience points to a larger set of issues likely to determine the growth trajectory of biotechnology in Asia: it will be the social and economic structures within Southeast Asian countries and their context specific needs that will determine what crops are enhanced using what biotechnologies and which traits of the crops are altered. As Redona and Mula (2004) argue, biotechnology products must be designed such that they complement rather than replace existing practices, enrich rather than disrupt the agro-enviroments for which they are targeted for deployment. Integration of new science with traditional knowledge is thus central to the evolution of the biotechnology sector in Southeast Asia. Indeed, for biotechnology to realise its full potential, the full engagement and sustained effective communication among all stakeholders and at all levels in the public, private, nongovernment organisations (NGOs), will be essential. Southeast Asia,

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quite literally, will have to evolve consultation and stakeholder engagement practices that radically transform recent political and decision making mechanisms in order to ensure the effective development of the sector. Governments in the region can, of course, play a catalytic role by developing responsive programmes and policies to ensure that the benefits of biotechnology applications will be enjoyed by poor farmers and consumers, through a stable household food and economic security, and sustainable farming systems (Zhang, 1999). Equally important, however, will be the public and non-profit sectors in collaboration with the private sector which, collectively, have important roles to play to ensure that the benefits of biotechnology are available to the poor in the region. These same issues extend to countries like China, where the successful establishment of a thriving biotechnology industry will require redistributive mechanisms to ensure that the vast population of rural dwelling farmers are able to access and reap the rewards of biotechnology developments. The border issue undergirding the success of the biotechnology sector in Asia, however, doubtlessly rests with issue of IP protection and enhancement so that venture capital, investment and capacity enhancement can ensue in the sector. Current IP practices in the region are opaque, IP protections are often weak, industrial espionage common place, and IP infractions often suffer from a less than responsive judicial system with appropriate compliance and enforcement capacity. The result is underinvestment in the sector with venture capital averse to the high risk of IP infringement. Many of these issues are being systematically addressed throughout Asia. China, for example, has been fine-tuning its patent laws since joining the WTO. Thailand, Malaysia, Indonesia, and Viet Nam too, the latter of which joined WTO in 2007, are all aware of the problem and show signs of steady progress. Ironically, however, as Asia moves to strengthen its IP measures the broader conundrum of standardising regulatory measures will loom larger if trade in biotechnology products is to drive the growth of the sector and contribute to its sustainability. There is a growing tension between the need for international regulatory harmonisation in global trade and the need to respond to domestic concerns about food and environmental safety, all of which are leading to a degree of uncertainty and unpredictability in the sector. Ambiguity still exists as to how environmental and health measures should be designed and applied so that they remain in harmony and consistent with relevant WTO Agreements. This precarious quandary exists mainly due to the

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periphrasis within the WTO Agreements themselves: uncertainties regarding the relationship between the Protocol and the WTO and between the WTO and Multilateral Environmental Agreements (MEAs), including the lack of international consensus on the benefits and risks of GMOs in different contexts, and more importantly, how to integrate and harmonise divergent views and circumstances into an effective international instrument. This uncertainty has only deepened and been further complicated by the emergence of two broad groupings of countries which have each favoured different approaches to GM products. As one group of countries has adopted the principle of “sound science evidence” as a basis for facilitating trade in GM products, the other has promoted the use of the “precautionary” principal in decision making when there is no absolute scientific certainty, thereby restricting trade in GM products. Both approaches appear to place these groups of countries at odds over a way forward in terms of the emergence of an international regulatory standard. Furthermore, this ever-growing ambiguity has already triggered some fear among several Asian countries that are exporting agricultural commodities to EU, as the export prospects of their agricultural products become increasingly bleak. In China, for instance, although BT Rice is being grown in a sizable area, the government is not officially acknowledging the fact due to fear of losing European rice markets. As a consequence, stringent prohibitive measures have already started to impact trade in BT Rice and rice-related products. It will be some years before there is a consistent global approach to trade in biotechnology products. The issues of major concern in relation to the future applications of biotechnology to crop improvement include: the evaluation of any risks to human health and the environment; the need for mandatory and/or voluntary labelling of GM foods and/or agricultural commodities for international trade; the relationship between countries responsibilities under the WTO; and international environmental treaties. In order to achieve international regulatory harmonisation on trade, particularly that related to GMO regulations across countries, existing WTO Agreements could be used, such as the Principles and Guidelines adopted by the Codex Alimentarius Commission in July 2003 regarding GM foods and the Cartagena Protocol on Biosafety. While applying the Codex Guidelines, the Cartagena Protocol and the WTO Agreement on the Application of SPS measures, assistance could be taken from Food and Agriculture Organisation (FAO), International Atomic Energy Agency (IAEA), United Nations Environment Programme (UNEP) and WHO to work together for

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developing a model regulatory framework that individual Southeast Asian countries could then adapt for their purposes. Just as the harmonisation of regulatory systems across countries was important, equally significant is also an appreciation of the need for regulatory harmonisation within the countries. Hence, there is a greater need for the coordination among ministries of agriculture, health, environment, commerce, science and technology in this region. In fact, the GMO regulatory framework would need to be drafted by a body involving ministries and experts working in areas such as agriculture, forestry, livestock, health, nutrition and environment.

Concluding comments China appears to be emerging as one of the central players in biotechnology not only in Asia, but also globally due to its enormous investments in this sector driven in part by concerns about agricultural productivity. The government strategies aim at enhancing China’s competitive position in international agricultural markets and institutionalising a modern market-responsive and internationally competitive biotechnology research and development (R&D) system. Yet, despite massive and sustained investments into the sector, there remain numerous challenges to the successful establishment of a thriving biotechnology industry in China. This includes access to venture capital and the rapid expansion of educational capacity in order to meet the needs for high-skilled scientists and technicians. China, however, does have some natural advantages. Unlike the EU and US, the average Chinese urban consumer appears relatively sanguine about GM products and the use of biotechnologies in food enhancement. Few Chinese reject GM products or associate them with serious health risks, providing investors into China’s biotechnology sector potentially greater incentives. China has also been proactive in its attempt to protect agricultural exports from international concerns about cross contamination by moving ahead with regulations requiring clearer mandatory labelling, ostensibly to avert the global debate over the benefits and safety of genetically modified (GM) food impacting China’s lucrative and growing agricultural export sector. But while regulatory standards, regulatory codification and enforcement is improving in China, change will be a long while in coming, especially in an agricultural sector that is both vast and complex. More importantly, the allied non-financial capital investment needed to support the sector will also require considerable resources; policy development,

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institutional capacity enhancement, educational innovation and improvement, stakeholder engagement and IP protections. Hence, an emphasis on education and learning, on developing new technologies and practices, on adapting social relations and institutions, on changing consumption and investment practices, and on evolving appropriate policy mechanisms will be required for some considerable time to come.

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Index Note: Page numbers followed by “f ” and “t” denote figures and tables, respectively. Academia Sinica, 272 Acer Computers, 233–4 aging of professoriate, 68 agricultural biotechnology, 265–91 background, 266–8 cost-benefit analysis, 284 developmental strategies of, 265–6 future prospects for, 286–90 GM crops, regulatory framework for, 277–80 objectives of, 265 public policy and, 280–3 trade and, 275–7 see also National Centre for Genetic Engineering and Biotechnology agri-food industries, 11, 180–206 Chinese competitive threat to, 194–6 see also palm oil Akamatsu, Kanamane, 183 Alcatel, 251 Anderson, Jonathan, 143 APEC Summit, 64 Arroyo, Gloria Macapagal, 27 ASEAN (The Association of Southeast Asian Nations) Chinese defence relations with, 33–4 Chinese investment in, 29 exports to China, 1 fresh fruits exports to China, 203–4 Informal Summit (fourth), 240 Memorandum of Understanding on Cooperation in ICT, 241 pan-Pacific garlic wars and, 191–2 Report of the Expert Group on Forging Closer ASEAN China Economic Relations (2001), 42 rice exports, impact of Chinese grain policy on, 201–3

seafood industries, Chinese competitive threat to, 194–6 Treaty of Amity and Co-operation, 4, 42, 51 ASEAN-China Business Council, 28 ASEAN-China food relations, 180–206 food producers, problematic position of, 182 framework for, 187–90, 190t increased penetration of, 190–1 manufacturing sector as a rehearsal for, 183–5 role of international trade agreements in, 185–7 ASEAN-China Information Superhighway, 241 ASEAN-China Joint Cooperation Committee, 20 ASEAN-China trade, 2, 31–2 agri-food products, 187–90, 188f, 188t, 189f, 189t barriers to trade, 42 in education services, 40–2, 41t ASEAN Free Trade Agreement, 26, 185–6 ASEAN Plus Three, 25–7 ASEAN Regional Forum, 6 ASEAN Three, The, 54–65 economic and educational indicators, 57t ASEAN Universities Network (AUN), 79–80 Asian Currency Unit (ACU), Singapore, 150–1 Asian Dollar Market (ADM), Singapore, 149, 150 Asia Pacific Economic Cooperation (APEC), 51, 52, 78–82, 240 Education Forum, 78 294

Index 295 Human Resources Development Working Group, 78–9 Qualifications Frameworks in, 79 Asian Development Bank, 30, 182 Asian dollar market, Singapore, 157t Asian regionalism, 50–1, 51t asset management Hong Kong, 137t Singapore, 156t Association of Pacific Rim Universities (APRU), 80–1 A.T. Kearny/Foreign Policy Globalization Index (2006), 162 Atomic Energy Council, Taiwan, 272 Australia, 33 trade in educational services, 45, 46t, 48–9, 49t, 50f Aventis, 273 Bangkok International Banking Facility Bangkok International Banking Facility (BIBF), 163 Bangkok International Finance Faculty, Thailand, 160 Bank Bumiputra, 250 Banking Act of 1970, Singapore, 149 Bank of America, 146, 150 Bank of China (BOC), 169 barriers to trade, 42, 51–2 Baxter, 267, 273 BD, 273 Becton Dickinson, 267 Beida Biotechnology Park, China, 280 Beijing, 6, 20, 68, 74 financial center, 140–2, 164–6 Foreign Languages, 80 international donors’ conference in, 30–1 National University of Singapore Overseas, 88 political diplomacy toward ASEAN member states, 4 universities in, 87, 107 Zhongguancun E-Park, 239 Beijing Declaration on ASEAN-China ICT Cooperative Partnership for Common Development, 241

Beijing Inti Management College (BIMC), 98 Binh Le Tran, 274 Biomedical Research Council of the Agency for Science, Technology and Research (A*STAR), Singapore, 282 Biomedical Science Group of the Singapore Economic Development Board (EDB), 282 Biomedical Sciences Innovate ‘N Create Scheme (BMS INC), Singapore, 282 Biotech Safety Management of Agricultural Gene Alteration (BSMAGA), 276 BioValley, Malaysia, 272 Bloomberg, 148 Brunei, 1, 3 energy security and consumption, 211–23, 214f, 216t, 217f, 219–22f, 227 energy efficiency, 222–3, 222f energy poverty, 218 environmental degradation, 218–22 potential disruptions in supply, 211–12 volatile prices, 212–17 Hu Jintao’s visit to, 4 Kikeh oil dispute between Malaysia and, 225 Burma see Myanmar Bush, George W., 24 Business Week, 255 Cabaret (film), 123 Cambodia, 1, 4, 21, 30 indicators of conditions of doing business in, 243t Canada trade in educational services, 45, 46t, 48–9, 49t, 50f Capital markets, 127, 128, 170 Cartagena Protocol, 276, 277 Central Asia, 33 Central Bank Law, 143 Certified Public Accountants (CPAs) (China), 147

296 Index Chai Yu, 2 Charoen Pokphand (CP) Group, 187 Chia, Eric, 250 Chiang Mai Initiative, 26 China accession to WTO, 43, 53, 142, 180, 200, 201, 238 agricultural biotechnology in, 265–91 research and development, 269, 270t, 271t, 275t agri-food relations with Thailand, 186–7 anti-US rhetoric, 23 competitive dynamics over access to energy, 6–7 competitive threat to ASEAN seafood industries, 194–6 contests over minor territorial sovereignties, 6 contribution to GDP, 1 corporate structure in, 247t defence relations with ASEAN countries, 33–4 demand for palm oil, 196–8 disputes over oil gas rights, 5–6 donations to Tsunami disaster, 31 as driver of growth, 43 economic relations, developments in, 27–32 electrical and electronics industry, 230–61 in global marketplace, 235–8 government policies to support, 238–41 structural constraints on entrepreneurship in, 241–9 11th Five year Plan, 141 exports to ASEAN, 1 food exports from ASEAN, 187, 187f, 188f, 187t food exports to ASEAN, 187–90, 187f, 188f, 188t increased penetration of, 190–1 GDP spent on education, 67 as global apple Emperor, 193–4 Higher Education law of 1998, 70 impact of grain policy on ASEAN rice exports, 201–3 imports of fresh fruits from ASEAN countries, 203–4

indicators of conditions of doing business in, 246t influence in Southeast Asia, 20–7 recent developments and, 25–7 large-scale enterprise, 233 leadership, 34–6 Lujiazui finance and trade zone, 141 Ministry of Education, 72, 74, 96 National Development and Reform Commission, 164 new security concept, 23 Pilot Scheme on Credit Transfer, 79 policy and practice, evolution of, 20–5 political accommodation, 4 political influence, 32–4 President’s Responsibility System, 70 Renminbi, 170–1 Special Economic Zones, 238–9 State Commercial Banks, China, 169 State Administration of Foreign Exchange, 165 state-capacity, 39, 52, 248 state-owned commercial banks, 169–70 support for international human rights, 21 survey of elite opinion, 3 territorial disputes with Southeast Asian countries, 22–3 Thompson Reuters, 148 Tiananmen Incident of 1989, 21 venture capital industry, 269 wholly owned foreign banks, 146, 147t see also Pudong; Report of the Expert Group on Forging Closer ASEAN China Economic Relations (2001); Xinhau News Agency China-ASEAN Cooperation Fund, 4 China-ASEAN cross-border educational services, 105t China-ASEAN cultural relations, 78 China-ASEAN Free Trade Agreement (CAFTA), 1, 24–5, 27–8, 42, 186, 241, 260 China-ASEAN free trade area, 1

Index 297 China Banking Regulatory Commission (CRBC), 146, 167 China-ASEAN relations, 1–7, 22 evolution of, 3 in higher education, 77–82 cultural agreements, 78 trade agreements and consortia, 78–82 China Construction Bank (CCB), 169 China Daily, 27, 29, 31 China Development Brief, 30 China, domestic banks, 146, 147t China Insurance Regulatory Commission, 165 China Threat, 23 China’s Peaceful Rise, 3 China-Southeast Asian economic relations, 27–32 decline in foreign direct investment, 29–30 developments in, 27–8 limitations in, 28–9, 30 China-Thailand Closer Economic Partnership Agreement (CEPA), 28 China-US garlic dispute, 191–2 Chinese aggression, 6 Chinese diaspora, in Southeast Asia, 42, 49, 54, 129, 168 Chinese Gold and Silver Market, Hong Kong, 137t Chinese higher education autonomy, 70 efficiency, 69–70 finance, 70–1 internal efficiency, 69–70 internationalisation, 71–7, 72f, 73–5t Professor Crunch, 68 Project 211, 68–9 Project 985, 69 quality, 67–9, 67t quantity, 65–7, 66t see also higher education system Chinese Institute of Certified Public Accounts (CICPA), 147–8 Christaller, W., 126 city-state Hong Kong, 149, 167, 168 Singapore, 149–52, 167, 168, 267

Clinton, Bill, 191 clustering, 125–30 Codex Alimentarius Commission, 289 collaboration multilateral, 238–41 Pan Asian, 274–5 College of Foreign Languages, Viet Nam, 102 College of Technology and Industrial Management (CTIM), Viet Nam, 104 Committee on Efficient Distribution of Life Insurance (CEDLI), 158t Committee on Rubber Trading (CRT), 155t Committee on Trade and Environment (CTE), 277 competitive challenges to Chinese higher education system autonomy, 70 efficiency, 69–70 finance, 70–1 internationalisation, 71–7, 72f, 73–5t quality, 67–9, 67t quantity, 65–7, 66t COMTRADE, 183 Corning Pharmaceutical, 267 corporate structure, in Southeast Asia, 245t Council of Agriculture, Taiwan, 272 Creative Technology, 234 cultural capital, 285 cultural relations, China-ASEAN, 78 Cyberjaya, Malaysia, 239 Dai hoc Dan lap Ky Thuat, 104 Dalai Lama, 24, 25 debt market Hong Kong, 136t Singapore, 154t decentralisation role in financial globalisation, 128–9 declining terms of trade, 12, 182 Deng Xiaoping, 140, 244, 255 Department of Health, Taiwan, 272

298 Index derivatives market (futures) Hong Kong, 138t Singapore, 157t differential pattern of engagement, 106 diversifying income sources, 39, 68 Domestic Banking Units (DBUs), Singapore, 150, 151, 173n11 Dow Jones, 148 Early Harvest Program (EHP), 186 e-ASEAN Framework Agreement, 240 East Asia Free Trade Area, 26 East Asian Community, 3 East Asian Summit (EAS), 25, 26–7, 32, 33 economic crisis, 20–1 Economic geography, 161 economic growth, 52–4 Economist, The, xi EDNET, 78 education services cross-border trade in, 40–2, 41t eduhubs, regional, 85 export earnings, 46 nett importers of, 40, 85, 107 Putonghua, rising demand for educational services in, 86, 107 Royal Melbourne Institute of Technology, 101 see also New Zealand; transnational higher education; Viet Nam National University electronic component manufacturing (ECM), 2, 13 electronic industry, 230–61 Eli and Company, 267 Ellison, Larry, 239 energy security and consumption, 210–27, 213–15f, 216t, 217f, 219–22f challenges to, 211–23 energy efficiency, 222–3, 222f energy poverty, 218 environmental degradation, 218–22

potential disruptions in supply, 211–12 volatile prices, 212–17 China-ASEAN regional cooperation and competition, 223–5 indicators of, 212t energy sovereignty, 224, 225 English language dominance, 49–50, 50t entrepôt trade hubs, 31, 131, 132, 148 entrepreneurship, structural constraints on, 241–9 environmental sustainability, 2 equities market Hong Kong, 136t Singapore, 155t ERASMUS/SOCRATES, 51 European Union (EU), 22, 32, 51 ban on Chinese seafood export to ASEAN countries, 195 Chinese investment in, 29 market for tapioca, 199 Exclusive Economic Zone (EEZ), 6 Falungong movement, 24, 25 financial centres Asia contest and competition among, 159–71 rise of China, implications of, 168–71 and endowed capacities, 129–30 fragmentation, role in financial globalisation, 128 international see international financial centres offshore, 123, 150–1 and place theory, 125–6 spatial distribution of, 125–9 spatial geographies, 124 see also Hong Kong; Shanghai; Singapore financial clustering, 11, 124–9, 160–4, 169 see also clustering; world cities financial density, 127, 162, 164 financial geography, 125–6 financial innovation, 142, 168

Index 299 financial intermediation, 125, 128, 129, 141 financial services economic hinterland, 126 location of place theory, 125–6 see also wholly owned foreign banks, China Financial Times, 129 Flextronics, 231, 236, 248, 256–8 Fold, Niels, 180 Food and Agriculture Organisation (FAO), 289 foreign bank branches (FBB), China, 146, 147t foreign direct investment (FDI), xii, 29, 52–3, 54 foreign exchange market Hong Kong, 135t Singapore, 154t “Framework Agreement on Comprehensive Economic Co-operation between ASEAN and China”, 185 France INSEAD, 85 free exchange market, Hong Kong, 172n4 Fudan University, 89 funding and higher education, 70–1 Gates, Bill, 239 Genelabs Diagnostics, 267 Gene Networks International (GNI), 279–80 General Agreement on Tariffs and Trade (GATT), 191, 192 General Insurance Association of Singapore (GIA), 158t Gene Singapore, 282 GeneSing China, 282–3 genetically modified (GM) plants, 281t genomics industry, 266 GlaxoSmithKline, 273 Glaxo Wellcome, 267

Global Agreement on Trade in Services (GATS) educational services and, 44–8, 46t, 47t Global cities, 127 Global Financial Centers Index, 173n13 Global Financial Crisis (GFC), 1, 4, 41, 53, 58, 61, 63, 64, 93 global market for higher education, 39 Global Trade Analysis Project (GTAP), 277 GMS Information Superhighway project, 241 Goh Chok Tong, 42, 152, 173n12 Greater Mekong Sub-region (GMS) framework, 241 Green Card system, 75 Guangzhou, 68 Guo Jinlong, 165 Haier Group, 231, 235 government support to, 254–5 human resource management, 254 just in time (JIT) inventory management, 254 programme of total quality control, 254 Zhang Ruimin’s leadership, 252–6 Hangzhou, 68 Hangzhou Biotechnology Park, China, 280 Heilongjiang, 71, 74 Heng Swee Keat, 173n12 higher education system competitive challenges to autonomy, 70 efficiency, 69–70 finance, 70–1 internationalisation, 71–7, 72f, 73–5t quality, 67–9, 67t quantity, 65–7, 66t dominance of English speaking nations, 49–50, 50t globalisation of, 39–40

300 Index higher education system – continued international enrolments, 95, 95t Private Higher Education Act of 1996, 92 regional trade in, 50–1, 51t accession to WTO, 43–4, 53 barriers to trade, 42, 51–2 GATS and, 44–8, 46t North South inequalities, 48–9, 48t, 49f potential for increasing, 42–3 setting, 40–2 see also Multimedia University of Malaysia; National Council on Higher Education Institutions Act of 1996, Singapore; Nanyang Business School, Singapore; Nanyang Technological University, Singapore; National Accreditation Board, Singapore; National Higher Education Fund Board Act of 1997, Singapore; National University of Singapore; Tsing Hua University Executive Programmed for Senior Singapore Civil Servants; United Nations University Institute of Advanced Studies Hong Kong, 29, 124, 130–9 asset management in, 137t banking sector in, 134t corporate structure in, 247t debt market in, 136t derivatives market (futures) in, 138t equities market in, 136t financial service sector in, 130–2, 134–8t contest and competition among, 164–8 see also Securities and Futures Commission foreign exchange market in, 135t free exchange market in, 172n4 higher education system in, 65 indicators of conditions of doing business in, 246t

institutional forms and regulatory approaches, 132–9 insurance, 138t money market in, 136t see also money market precious metals market in, 137t Securities and Futures Commission, 133, 136t Stock Exchange of Hong Kong, 138t Stock Exchange of Hong Kong Options Clearing House Company, 138t Hong Kong Exchanges and Clearing Limited (HKEx), 133, 136t, 166 Hong Kong Futures Exchange (HKFE), 138t Hong Kong Futures Exchange Clearing Corporation (HKCC), 138t Hong Kong Monetary Authority (HKMA), 133, 134–7t, 165 Hong Kong Science Park, China, 280 Hong Kong Securities Clearing Company (HKSCC), 138t Hsinchu Science-Based Industry Park, Taiwan, 238 Huawei Technologies, 235, 236 Hu Jintao visit to ASEAN countries, 4 Hun Sen, 21 IBM, 235–6 Idei, Nobuyuki, 239 Index to Scientific and Technical Proceedings (ISTP), China, 68 India, 22, 32, 33 Indonesia, 1–4, 30, 33 agricultural biotechnology future prospects for, 287 research and development, 275t anti-Chinese violence, 20 corporate structure in, 245t economic relations with China, 28 energy security and consumption, 211–23, 214f, 216t, 217f, 219–22f, 227 energy efficiency, 222–3, 222f energy poverty, 218

Index 301 environmental degradation, 218–22 potential disruptions in supply, 211–12 volatile prices, 212–17 Hu Jintao’s visit to, 4 indicators of conditions of doing business in, 243t Ministry of Education, 96 National Committee on Biotechnology, 282 National Science and Technology Development Programme, 282–3 opposition against US War on Terrorism, 32 palm oil industry, 197, 198 Tech Transfer Offices, 286 see also palm oil information and communications technologies (ICTs), 58–60, 77, 239, 240–1 see also Multimedia Supercorridor, Malaysia Initial Public Offering (IPO), 132, 166, 266 Inner Mongolia economic growth for agri-exporters in, 184 Innovation Development Fund, Thailand, 273 Institute for Agro Biotechnology, Malaysia, 272 Institute for Genomics and Molecular Biology, Malaysia, 272 Institute for International and Strategic Studies, 24 Institute for Pharmaceutical and Neutraceutical Biotechnology, Malaysia, 272 Institute of Molecular and Cell Biology (IMCB), Singapore, 282–3 institutional autonomy, 70 institutional capacity, 50, 148, 283 insurance Hong Kong, 138t Singapore, 158t intellectual property rights, 51 protection of, 288

International Atomic Energy Agency (IAEA), 289 International Energy Agency, 211 international financial centres (IFC), 123 fragmentation of, 128 globalisation in, 128 Hong Kong see precious metals market; Stock Exchange of Hong Kong; Stock Exchange of Hong Kong Options Clearing House Company location of, 129–30 Labuan International Business and Financial Center, 160, 173–4n14 public policy and, 124, 130 size of, 125–6 spatial distribution of, 125–9 see also China; Lujiazui finance and trade zone; financial centers; Hong Kong; New York; People’s Bank of China; state-owned commercial banks; London; PriceWaterhouseCoopers; Safety Box financial centre; Qualifying Debt Securities scheme; Shanghai; Singapore; Sydney; Tokyo; transaction volume; trade hub; transportation hub; world cities; Xinhau News Agency International Islamic University of Malaysia (IIUM), 94 International Master of Business Administration (IMBA) programme, 88 International Monetary Fund (IMF), 169, 182 International Trade Commission (ITC), United States, 191 Invigoration Thai Business Programme of the Department of Industrial Promotion, 273 Iraq Unites States war in, 34 iron rice bowl, 53 Islam and Confucianism: A Civilizational Challenge, 97

302 Index Jabatan Telekom Malaysia (JTM), 250 Japan, 18, 51 Chinese investment in, 29 disputes with China, 6 economic power in Southeast Asia, 22 financial service sector in, 159, 160 multinational enterprises, 2 security cooperation with United States, 24 Jarvis, Darryl S.L., 1, 123 Jiang Zemin, 20 Jiangsu, 74, 160 Jilin Guangdong, 74 joint venture banks (JVB), China, 146, 147t KFC, 198 Knowledge economy, 130 Kodak, 257 Koh Yong Guan, 173n12 Koizumi, Junichiro, 25, 27 Labuan International Business and Financial Center, Malaysia, 160, 173–4n14 Laos, 1, 4 Chinese aid to, 30 indicators of conditions of doing business in, 243t leadership, 34–6 Lee Kuan Yew School of Public Policy (LKY SPP), 89 Lee Teng-hui, 23 Lembaga Akreditasi Negara (LAN), 94 Lenovo, 235–6 Leung, Cynthia, 172n2 Liaoning, 74 Lim Chee Onn, 173n12 Lim Hng Kiang, 173n12 Lip-Bu Tan, 257 Liu Tienan, 164 livestock, 181 London, financial centre, 127, 128, 140, 151 see also financial centres; international financial centres Lucien Wong Yuen Kuai, 173n12

Malaysia, 1, 2, 56–9, 57t, 77 agricultural biotechnology policy agenda toward, 281–2 research and development, 272, 275t and China, trade between, 59 corporate structure in, 245t disputes over oil gas rights, 5–6 doing business in indicators of conditions of, 243t economic relations with China, 28 electrical and electronics industry government policies to support, 239 energy security and consumption, 211–23, 214f, 216t, 217f, 219–22f, 227 energy efficiency, 222–3, 222f energy poverty, 218 environmental degradation, 218–22 potential disruptions in supply, 211–12 volatile prices, 212–17 Fifth Malaysia Plan, 249 GDP growth of, 58 higher education system, 89–96 international enrolments, 95, 95t policy implications toward, 105–8 trade and collaboration in, 96–8 undergraduate enrolments, 90–1, 91t higher educational institutions, 91–2, 92t Institute for Agro Biotechnology, 272 Institute for Genomics and Molecular Biology, 272 Institute for Pharmaceutical and Neutraceutical Biotechnology, 272 International Islamic University of Malaysia (IIUM), 94 Kikeh oil dispute between Brunei and, 225 Lembaga Akreditasi Negara, 94 Malaysia Inc., 92, 96

Index 303 Malaysian Association of Private Colleges and Universities (MAPCU), 96 Multimedia University of Malaysia, 97 Multimedia Supercorridor, 239 National Accreditation Board, 92 National Committee on Biotechnology, 282 National Council on Higher Education Institutions Act of 1996, 92 National Higher Education Fund Board Act of 1997, 92 National Science and Technology Development Programme, Malaysia, 282–3 NBBnet, 281 New Economic Policy, 56, 244 Ninth Malaysia Plan, 281, 286 palm oil industry, 196–8 population, 56 post-colonial development, 56–8 postgraduate enrolments, 90, 90t Private Higher Education Act of 1996, 92 Putrajaya, 239 Seventh Malaysia Plan (1996–2000), 93 Universities and University Colleges (Amendment) Act of 1996, 92 Vision 2020, 58–9 War on Terrorism, opposition against, 32 see also Labuan International Business and Financial Center; Mohammed, Mahathir; palm oil; United Malays National Organisation; University of Malaya manufacturing sector as rehearsal for ASEAN-China food relations, 183–5 maritime services, 161 Material Transfer Agreements (MTAs), 286 Matsushita, 232 McDonald’s, 198

McNamara, Michael, 256, 258 Merck, 273 Mohamad, Tan Sri Musa, 94 Mohammed, Mahathir, 239, 251 see also United Malays National Organisation money market Hong Kong, 136t Singapore, 155t Motorola, 236 Multilateral Environmental Agreements (MEAs), 276, 289 Multimedia Supercorridor (MSC), 239 see also Malaysia Multimedia University of Malaysia (MMU), 97 multinational enterprises (MNEs), 2 Myanmar, 1, 4, 21, 22 Nanyang Business School, 88–9 Nanyang Technological University (NTU), Singapore, 82, 85 Nanyang University see National University of Singapore National Accreditation Board, Singapore, 92 National Biotechnology and Bioinformatics network (NBBnet), 281 National Centre for Genetic Engineering and Biotechnology (BIOTEC), Thailand, 273–4 National Committee on Biotechnology, Malaysia, 282 National Council on Higher Education Institutions Act of 1996, Singapore, 92 National Development and Reform Commission (NDRC), China, 164 National Economics University of Ha Noi, Viet Nam, 104 National Higher Education Fund Board Act of 1997, Singapore, 92 National Science and Technology Development Agency (NSTDA), Thailand Company Directed Technology Development Programme, 273 Investment Centre, 273

304 Index National Science and Technology Development Programme, Malaysia, 282–3 National University of Singapore (NUS), 82, 85, 87–8, 267 Neilson, Jeff, 180 Netherlands, the, 199 new agricultural (export) countries (NACs), 182, 205 newly industrialising country (NIC), 182 Newly Industrialising Economies (NIEs), 183 New York, financial centre, 127, 128, 140, 151 see also financial centres; international financial centres New Zealand, 33 trade in educational services, 45, 46t, 48–9, 49t, 50f Nokia, 232, 240, 251 Nomura Research & Advisory (NR&A), 279 Nortel, 257 North American free trade area, 1 Northeast Asia, 2 North South inequalities, 48–9 Oculex, 267 oleochemical industry, 198 Organization for Economic Co-operation and Development (OECD), 43, 48, 48t, 52, 68, 167, 213 original design manufacturers (ODM), 232, 236 original equipment manufacturers (OEM), 232, 235 Palm oil, 189f China’s demand for, 196–8, 204–5 Pan Asian collaboration, 274–5 Peking University, 89 People’s Bank of China (PBOC), 143, 145t, 146, 165, 167 Perdana Leadership Foundation, 251 Pfizer, 273

Philippines biotechnology research and development, 275t corporate structure in, 245t economic relations with China, 28, 29 electrical and electronics industry government policies to support, 239 energy security and consumption, 211–23, 214f, 216t, 217f, 219–22f, 227 energy efficiency, 222–3, 222f energy poverty, 218 environmental degradation, 218–22 potential disruptions in supply, 211–12 volatile prices, 212–17 fresh fruits exports to China, 203 Hu Jintao’s visit to, 4 indicators of conditions of doing business in, 243t Philippines Economic Zone Authority (PEZA), 239 withdrawal of US forces from, 22 Place theory, 125–6 Plessy, 251 precious metals market, Hong Kong, 137t PriceWaterhouseCoopers (PWC), 146 Pritchard, Bill, 180 Private Higher Education Act of 1996, Singapore, 92 public policy, and financial centers, 124, 130 Pudong, China, 141, 257 Putin, Vladimir, 25 Putrajaya, Malaysia, 239 Qingdao Home Appliance Company, 253 Qingdao Refrigerator General Factory, 253 Qualifying Debt Securities (QDS) scheme, Singapore, 154t Regional Economic Crisis (of late 1990s), 41

Index 305 regional trading blocs, 43 Report of the Expert Group on Forging Closer ASEAN China Economic Relations (2001), 42 Rice Genome Project Thailand, 274 Royal Melbourne Institute of Technology (RMIT), 101 Rubber Association Singapore (RAS), 155t Russia, 33 influence in Southeast Asia, 22 Safety Box financial centre, 167, 168 SapuraCrest Petroleum, 251 Sapura Defence, 251 Sapura Energy, 251 Sapura Group, 231, 235, 248 BMW dealership, 252 and Malaysian entrepreneurship, 249–52 Sapura Industrial, 251 Sapura Resource Berhad, 251 Sapura Technology Berhad (STB), 251 Scale economies, 127–9 Schering Plough, 267, 273 Scholtes, Philippe, 274 Science Citation Index (SCI), 68 science parks, 238–41 Securities and Futures Commission (SFC) (Hong Kong), 133, 136t semiconductor industry, 234, 259 SemIndia, 257 September 11, 2001, 22 service sector trade barriers to, 42, 51–2 critical challenges to, 54 declining terms of, 12, 182 in education services see under higher education system financial, 130–2, 134–8t, 140–51, 144–5t, 160, 164–8 food trade see ASEAN-China food relations rise in, 44 Shamsuddin, Abdul Kadir, 248, 249 Shamsuddin, Shahril, 251 Shandong, 74

Shanghai, 68, 124 11th Five Year Plan, 141 financial service sector in, 131, 140–8, 144–5t, 160 contest and competition among, 164–8 institutional forms and regulatory approaches, 141–8 Pudong New Area, 141, 172n7 see also PriceWaterhouseCoopers; Treaty of Nanjing Shanghai Cooperation Organisation (SCO), 33 Shanghai Stock Exchange, 166, 254 Shanmugaratnam, Tharman, 173n12 Shih, Stan, 233, 238 Shin Corp, 235 Siemens, 251, 273 Sim Wong Ho, 234 Singapore, 1–3, 24, 33, 43, 59–62, 82–9, 124 agricultural biotechnology, 267 policy agenda toward, 282 Asian Currency Unit, 150–1 Asian Dollar Market, 149, 150, 157t asset management in, 156t Banking Act of 1970, 149 banking sector in, 153t Biomedical Research Council of the Agency for Science, Technology and Research (A*STAR), 282 Biomedical Science Group of the Singapore Economic Development Board, 282 Biomedical Sciences Innovate ’N Create Scheme, 282 biotechnology-related ventures in, 267 research and development, 273 corporate structure in, 245t debt market in, 154t derivatives market (futures) in, 157t Domestic Banking Units, 150, 151, 173n11 Economic Development Board, 248, 273 economic relations with China, 28

306 Index Singapore – continued energy security and consumption, 211–23, 214f, 216t, 217f, 219–22f, 227 energy efficiency, 222–3, 222f energy poverty, 218 environmental degradation, 218–22 potential disruptions in supply, 211–12 volatile prices, 212–17 equities market in, 155t financial service sector in, 148–51 contest and competition among, 164–8 foreign direct investment, 61, 62t foreign exchange market in, 154t GDP growth of, 59–60 as Global Schoolhouse, 85 gold and commodities market in, 156t government education spending, 60 higher education system, 82–6 policy implications toward, 105–8 postgraduate enrolments, 83–4, 84t studying abroad, 82t, 83 trade and collaboration in, 86–9 undergraduate enrolments, 83, 84t indicators of conditions of doing business in, 243t Institute of Molecular and Cell Biology, 282–3 institutional forms and regulatory approaches, 151–9 insurance, 158t International Master of Business Administration programme, 88 Ministry of Education, 83 Monetary Authority of Singapore, 149–52, 153t, 155t, 156t, 158t, 165, 173n11 money market in, 155t see also money market Multimedia Development Corporation, 251, 252

Nanyang Business School, 88–9 Nanyang Technological University, 82, 85 National Accreditation Board, 92 National Council on Higher Education Institutions Act of 1996, 92 National Higher Education Fund Board Act of 1997, 92 National Information Technology Plan, 60 National University of Singapore, 82, 85, 87–8, 267 population, 59 Private Higher Education Act of 1996, 92 Qualifying Debt Securities scheme, 154t Rubber Association Singapore, 155t as safety box banking centre, 167–8 service sector growth rate, 61 state-capacity, 59 trade in services, 61–2 Singapore Biotech Pte Ltd, 273 Singapore Commodity Exchange (SICOM), 155t Singapore Economic Development Board, 258 Singapore Exchange Derivatives Clearing Pte Ltd (SGX-DC), 157t Singapore Foreign Exchange Market Committee (SFEMC), 154t Singapore Insurance Brokers Association (SIBA), 158t Singapore Technologies Group (STG), 235, 244 Singapore University of Management (SUM), 85, 89 Sino-Cambodia relationship, 21 Smach, Thomas, 256, 258 Small Industry Finance Corporation (SIFC), Thailand, 273 SmithKline Beecham, 267 soft institutional capacity, 148 South Korea, 2, 8 financial service sector in, 163 Southeast Asia, 1, 3, 18, 21–5 corporate structure in, 245t

Index 307 electrical and electronics industry, 230–61 in global marketplace, 235–8 government policies to support, 238–41 structural constraints on entrepreneurship in, 241–9 indicators of conditions of doing business in, 243t see also China-Southeast Asian economic relations Special Economic Zones (SEZs), China, 238–9 Spratly islands, 6, 225 Stanley Foundation, 28 State Administration of Foreign Exchange, China, 165 State Council Information Office (SCIO), 173n9 state-owned commercial banks (SCBs), 169–70 Stock Exchange of Hong Kong (SEHK), 138t Stock Exchange of Hong Kong Options Clearing House Company (SEOCH), 138t Sumitomo, 251 Sutter, Robert, 18 Suwandi, Rini, 43 Sydney, financial center, 129 see also financial centres; international financial centres Taiwan, 18, 19 biotechnology research and development, 271–2 diplomatic/economic influence in the region, expanding, 23–4 economic crisis, 20–1 economic growth for agri-exporters in, 184 Hsinchu Science-Based Industry Park, 238 National Science Council, 272 semiconductor industry, 259 territorial disputes between China and, 22–3, 25 Tan, Peter, 256–7 Technical Barriers to Trade (TBT), 277

telecommunications, 232 Teo Ming Kian, 173n12 TetGen, 283 Thailand agricultural biotechnology, 266 research and development, 269, 275t agri-food relations with China, 186–7 Bangkok International Finance Faculty, 160 corporate structure in, 245t economic growth for agri-exporters in, 184 economic relations with China, 28 energy security and consumption, 211–23, 214f, 216t, 217f, 219–22f, 227 energy efficiency, 222–3, 222f energy poverty, 218 environmental degradation, 218–22 potential disruptions in supply, 211–12 volatile prices, 212–17 financial crisis of 1997–1998, 4 fresh fruits exports to China, 204 IMF funding for economic crisis, 20 indicators of conditions of doing business in, 243t military ties with United States, 32 Ministry of Education, 96 National Centre for Genetic Engineering and Biotechnology, 273–4 National Science and Technology Development Agency Company Directed Technology Development Programme, 273 Investment Centre, 273 rice exports to China, 201 impact of grain policy on, 202 Rice Genome Project Thailand, 274 seafood industries, Chinese competitive threat to, 194 tapioca complex, deindustrialisation of, 198–201

308 Index Thailand – continued see also China-Thailand Closer Economic Partnership Agreement Thompson Reuters, 148 Tiananmen Incident of 1989, 21 Tianjin, 68, 74, 104, 165 Tokyo, financial centre, 127, 128, 140, 151, 159, 163 see also financial centres; international financial centres tourism, 77 trade hub, 31, 131, 132, 148 Trade-related Aspects of Intellectual Property Rights Agreement (TRIPs), 277 transnational higher education, 71–7, 72f, 73–5t transaction volume, 123, 126 transportation hub, 160, 161 Treaty of Nanjing, 140 Tsing Hua University, 89 Executive Programme for Senior Singapore Civil Servants, 89 Uniphone Works, 250 United Malays National Organisation (UMNO), 249, 250 United Microelectronics Corporation (UMC), 238 United Motor Works (UMW), 250 United Nations Environment Programme (UNEP), 289 United Nations University Institute of Advanced Studies (UNU-IAS), 279 United States (US), 3, 18 Chinese investment in, 29 Chinese policy with, 24 “Cobra Gold” military exercise, 24 garlic war between China and, 191–2 indicators of conditions of doing business in, 243t, 246t influence in Southeast Asia, 22 International Trade Commission, 191 military ties with Thailand, 32 military ties with Viet Nam, 32 security cooperation with Japan, 24

September 11, 2001, 22 trade in educational services, 45, 46t, 48–9, 49t, 50f war in Iraq, 34 War on Terrorism, 19, 32 UNIVERSITAS 21, 81 Universities and University Colleges (Amendment) Act of 1996, Singapore, 92 University Mobility in Asia and the Pacific (UMAP), 51, 79 University of Chicago Graduate School of Business, 85 University of Hong Kong, 104 University of Malaya Centre for Civilisational Dialogue, 97 value-chains, 2 venture capital industry, 269 Viet Nam, 1, 3, 22, 62–5, 187 accession to ASEAN membership, 64 aspiration for WTO membership, 63 biotechnology research and development, 274, 275t China’s aid to, 30 College of Foreign Languages, 102 College of Technology and Industrial Management (CTIM), 104 contests over minor territorial sovereignties, 6 corporate structure in, 245t energy security and consumption, 211–23, 214f, 216t, 217f, 219–22f, 227 energy efficiency, 222–3, 222f energy poverty, 218 environmental degradation, 218–22 potential disruptions in supply, 211–12 volatile prices, 212–17 foreign direct investment, 63 fresh fruits exports to China, 204 GDP growth of, 63–4

Index 309 higher education system, 98–102 policy implications toward, 105–8 postgraduate enrolments, 99–101, 103t targets, 99t trade and collaboration in, 102–5 undergraduate enrolments, 99–101, 103t Hu Jintao’s visit to, 4 indicators of conditions of doing business in, 243t military ties with United States, 32 Ministry of Education and Training, 101, 102 Ministry of Trade, 64 National Economics University of Ha Noi, 104 relationship with China, history of, 62–3 rice exports to China, 201 service sector growth rate, 64 state-capacity, 63, 98, 106 tapioca industry, 199 Trade Agreement with China, 64 Vietnamese Fruit Producers Association (VinaFruit), 204 Viet Nam National University (VNU), 102 Vietnam Post and Telegraph (VNPT), 235 Walmart, 233 War on Terrorism, 19, 32 Welch, Anthony, 1, 39 Wen Jiabao, 25–7, 32 wholly owned foreign banks (WOFB), China, 146, 147t

Wiinsemius, A., 149 Woon, Walter, 173n12 World Bank, 30, 44, 64, 67, 162, 182, 242 world cities, 126–7 World Economic Forum, 174n14 World Health Organisation (WHO), 30, 267, 289–90 World Trade Organization (WTO), 28 China’s accession to, 43–4, 53, 142, 238 Dispute Settlement Body, 278 Viet Nam’s accession to, 63 Wyeth, 273 Xerox, 257 Xinhau News Agency, 148, 173n9 Xinjiang economic growth for agri-exporters in, 184 Yangtze River Delta, 140, 141, 160 Yoshihara, Kunio, 249 Zhang Ruimin as Chairman of Haier Group, 252–6 as head of Qingdao Refrigerator General Factory, 253 as vice-manager of Qingdao Home Appliance Company, 253 Zhejiang Province, 160 Zhongguancun E-Park, China, 239 Zhongguancun Science Park, China, 280 Zhu Rongzhi, 70