APEC at 18: Looking for a new growth paradigm and strategy

When the 21 leaders of APEC economies – including President Barack Obama, President Hu Jin-Tao, and our own President Aquino – meet next month in Yokohama, it will be the 18th time that APEC heads will do so. I have been privileged to attend all the APEC Summits beginning with the first one in Blake Island, just off Seattle, in 1993 – the first three meetings as secretary of foreign affairs and from 1996 onwards representing the private sector through the APEC Business Advisory Council (ABAC).

Key apec events

Four events take place during every APEC Leaders’ Meeting: the Joint Ministerial Meeting; the ABAC Dialogue with Leaders; the APEC CEO Summit; and the Leaders’ Meeting of course.

The Joint Ministerial Meeting is the single occasion when Trade and Foreign Affairs Ministers meet and issue a Statement that incorporates the outcome of the various Sectoral Ministerial Meetings that have taken place during the year with the exception of Finance Ministers who issue their own statement. I have long criticized why the Finance Ministers process follows a separate track when developments in that sector have a profound impact on trade and investments and commerce in general, most recently evident during the 2008-2009 global financial crisis. The only change that has taken place over the last decade has been for the Finance Ministers to hold their meetings in the same country just before the Joint Ministerial Meeting.

ABAC membership consists of three CEOs per economy as nominated by their respective Leaders. To my knowledge, the ABAC Dialogue with Leaders is the only one of its kind in the world. On Nov. 13, the ABAC members will once again have an informal dialogue with the 21 APEC Leaders. During that Dialogue, ABAC has the opportunity to exchange views on key issues and recommendations. In 1996, as the founding chairman of ABAC, I initiated this dialogue in the hope that it would be institutionalized in the APEC process.

The first APEC CEO Summit was organized in 1996 during the Philippine chairmanship of APEC. I recall the resistance I got from APEC Senior Officials (including an arrogant US representative) when I first proposed the holding of the first APEC CEO Summit (it was first called APEC Business Forum) in my capacity as ABAC’s chairman. They thought that it would detract from ABAC’s role. In fact, it complemented it by creating a forum where the region’s businessmen could listen to the views of policy makers and network with each other. Where else can you get as many leaders and ministers addressing businessmen in the course of two days? Only the World Economic Forum can get so many heavyweights in one event. The CEO Summit has since become the premiere business networking event of the year in the region.

The Leaders’ Meeting is, of course, the highlight of the APEC year and some say that gathering the Leaders of the economies that represent 2.7 billion people and account for approximately 55 percent of world GDP and 43 percent of world trade, in one place, is reason enough for APEC’s continued existence. Often criticized as a talk shop, APEC has in fact succeeded in moving the region forward towards greater integration of economic activities even though the magnitude of the impact has been difficult to measure. In the course of the eighteen years that I have participated in the APEC process, I have witnessed its evolution from an organization that was more focused on liberalization as the be-all and end-all for economic growth to one that is becoming more comprehensive in its approach to economic development and fairly responsive to the changes in the global economic environment.

Asian financial crisis: Apec failure

Although APEC rests on the three pillars of liberalization, facilitation and economic and technical cooperation, the heady days of the mid-’90s when global trade was booming placed heavy emphasis on lowering barriers at the border – taxes and duties – as the pathway to economic growth. And who would argue? Export-oriented Asian economies were growing at an unprecedented rate. Then came the “Asian” financial crisis of 1997-1998 – so-called because it started in Thailand and quickly engulfed most of Asia. The crisis revealed that liberalization could have unforeseen consequences if the economic fundamentals are weak and economic governance is not yet effective. APEC failed to forge effective policies in response to the crisis – in fact it almost completely ignored it as evidenced by the fact that while Asian economies were tanking, Early Voluntary Sectoral Liberalization (EVSL) was the most noteworthy outcome of the Leaders’ Meeting in Vancouver in 1997. Consequently, APEC lost its momentum and entered a period of stagnation and near irrelevance. APEC’s goal of being a platform for intra-APEC liberalization proved to be too ambitious to the extent that the first deadline of 2010 for the achievement of the Bogor goal of free and open trade in the region by developed member economies has largely been a non-event.

Despite the rhetoric, liberalization in APEC was placed in the back burner, with most APEC members preferring to pursue it through bilateral and regional free trade arrangements. In any case, tariffs had been steadily going down generally, except in a few areas like agricultural products, textiles and automobiles where tariffs remained high or were replaced by non-tariff barriers. The average tariff in the APEC member economies has come down less than five percent now from 17 percent in 1989 when APEC began.

Ease of doing business

It was then that the impact of the costs associated with moving goods through customs, with complying with varying technical standards, with different tariff classifications and nomenclature on the final price of the goods assumed greater significance than tariff duties. And here, APEC has proven to be an effective medium for achieving much progress in this area of trade and investment facilitation –even more than the WTO which has only belatedly taken it on and then only to the limited area of transparency and customs procedure. APEC claims that savings of five percent of transaction costs have been realized in 2006 as a result of this initiative and another five percent reduction has been targeted between 2007 and 2010.

It was because of its success in this area that APEC began to recover its footing. As it delved into this area, it became more apparent that beyond-the-border impediments – which fall under the generic description of “ease of doing business” – exert a negative influence on the flow of commerce and hence on a nation’s competitiveness. This development is a recognition of the way commerce is conducted these days with the supply chain traversing multiple borders – that is to say, firms operate in multiple locations across national borders. Components are manufactured in one location and assembled in another. Or a company manufactures one product line in one economy and another product line in another but sell to both. APEC is also removing behind-the-border barriers to trade through its Structural Reform agenda, which focuses on reforming domestic policies and institutions that adversely affect the operation of markets, and the capacity of businesses to access markets and to operate efficiently. Thus business facilitation has now assumed greater prominence in APEC’s agenda.

Reassessment: Long term growth strategy

The recent global economic crisis has, however, brought home to APEC member economies the need to reassess their approach to economic growth. In 2009, APEC Leaders’ concluded that it cannot be “business as usual” – the prevailing economic model was no longer sufficient to ensure that all sectors of society benefit and that the world’s rapidly dwindling natural resources and the environment would have to be safeguarded.  New growth paradigms would have to be established. Thus Leaders agreed to formulate a comprehensive long-term Growth Strategy that supports more balanced growth within and across APEC economies, achieves greater inclusiveness in society, sustains the environment, and raises growth potential through innovation and a knowledge-based economy.

Japan’s challenge as the 2010 chair is to put flesh into this new strategy whose implementation will now be measured as part of each member’s action plan and in which collective action will be taken to help achieve the new paradigms. In taking this new approach, APEC is not moving away from its original goal of achieving prosperity by promoting free and open trade and investments in the region. The logic is that by improving the quality of growth, people in the APEC region will also develop an increasing level of comfort and support for further liberalization of trade and investment, which will in turn foster economic growth.

In my next installment of this column, I will elaborate on this new growth paradigm and how it will be applicable to the Philippines. –Roberto R. Romulo (The Philippine Star)