SpecialArticle 2Interview with Dr. Muhamad Chatib Basri, Senior Lecturer, Department of Economics, Universityof Indonesia & Former Minister of Finance of Indonesia

How Can We Achieve Regional Peace & Prosperity in
the Asia-Pacific Area Against Rising Geopolitical Crises?
By Japan SPOTLIGHT
Asia-Pacific economies, in particular Southeast Asian economies, have been a driving force behindworld economic growth for decades, and they currently maintain the highest growth potential. But this isbeing challenged by the global pandemic and geopolitical crises, as well as their economies having
reached maturity, which makes it difficult for them to achieve outstanding higher growth.
Dr. Muhamad Chatib Basri from Indonesia, a distinguished leading thinker in this region, kindly
responded to our questions in the following interview.
(Online interview on Sept. 7, 2022)

Economic Outlook for the Southeast Asian
EconomyJS: What is your current outlook for the Southeast

Asian economy in light of rising energy and foodprices caused by Russia’s invasion of Ukraine, andUS monetary tightening?

Basri: Let me answer from two perspectives. The first is the shortterm perspective. If you look at the current situation in the Southeast
Asian economy, I would say that currently the impact is still relatively
minimal. For example, inflation in many Southeast Asian economies
is still low compared with countries in Europe and the United States;
even though inflation is rising, it is still relatively low. If you look at
the growth of Southeast Asian economies, including countries likethe Philippines, where growth is about 8%, and Indonesia has
growth of 5.4%, so many Southeast Asian countries remain resilient
despite the current situation. At this stage we still haven’t really seen
the spillover from the war in Ukraine, the tightening of US interest
rates, and high energy and food prices. I believe the reason behind
this is a lag effect. The US is technically in a recession, with negative
growth for two consecutive quarters, but the impact on the rest of
the world may appear sometime next year.
Another reason is that countries like Indonesia benefit from highenergy and commodity prices, and that explains why our exports
were still relatively strong despite the tightening cycle in US
monetary policy. The third reason that Southeast Asian countries are
not facing inflation like in advanced economies is that the stimulus
was relatively low compared with Europe and the US, so the
inflationary impact is relatively lower at this point. But these are only
the short-term issues.
My second perspective is the long-term perspective. I believe theFederal Reserve will continue with the tightening cycle to combat
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inflation in the US, and I wouldn’t be surprised if, in the next round, it
continues to raise interest rates by 50 or 75 basis points. The US
somehow needs a recession to contain inflation. Similar things also
apply in Europe. With the two major economies – the US and the EU– facing the possibility of a recession, there will also be an effect on
countries like China and Japan. Once China and Japan are affected,
we will probably see a slowdown in the Southeast Asian economy
sometime next year. Given the fear of a recession, there is apossibility that energy prices and commodity prices will not be as
high as in 2022. This has implications for countries like Indonesiathat might face slower growth. My point is that the short-term
outlook looks OK, but there are a lot of challenges that many
Southeast Asian economies need to anticipate, including social anddevelopment issues like the K-shaped recovery and the scaling effectof the pandemic.

Industrial Policy to Save Global Supply
Chains from Geopolitical Crises
JS: Thank you. My next question is about global

supply chains. Current geopolitical crises appear tobe having a significant negative effect on global
supply chains. What do you think will be the key
roles for major countries’ industrial policies incontaining this negative impact?

Basri: This is a very important question. With regard to the fear ofdisruption of supply chains, I see two competing forces here. The
first is that many countries around the world will probably start tothink about the importance of economic security. One thing they’ve
learned from the pandemic is that they could not rely on othercountries or be fully dependent on other countries. Look at what
happened when China became the hub of the production network.
https://www.jef.or.jp/journal/

When the pandemic hit China in Wuhan, for example, we witnessed
the collapse of global supply chains. This also contributed tostagflation. From this experience, many countries will probably learn
that they need to diversify risk. They cannot rely entirely on one
particular country or be entirely dependent on a global supply chain.
The implication is that we will probably see the diversification ofinvestment and production hubs and networks away from China toSoutheast Asian economies, for example. This is because it’s too
risky to rely on your production network being based entirely in one
particular country, so you need to diversify the production base. I
wouldn’t be surprised if we see many investors reallocate theirinvestment from China to Vietnam and other Southeast Asian
countries to diversify the risk. That is the first one.
The second force is that probably, in terms of this policy, someproducers will change their strategy from “Just in time” inventory
management to “Just in case”, in the sense that you cannot afford tohave supplies just in time. If something happens, you need thesecurity, you need inventory. This has the implication that inventory
costs could increase, because you need a certain level of stock inthese situations. In short, I would say there is a tendency that due toeconomic security, supply chains will not be as integrated as what
we had in the past.
But there are competing forces here. I do not think any country
can afford to become an autarky, to rely only on their own domesticresources. This is because consumers will prefer high-quality goods
and services that are relatively cheap. Therefore, I do believe that therole of supply chains will continue to be important. The question ishow we strike a balance between those two.
One potential solution that I might see in the future is that the roleof technology and digital become very important. Perhaps, if
something happens in one particular country, artificial intelligence(AI) can help to identify the countries in which that kind of stock orinventory is available. One country cannot rely only on one particularcountry, but they do have information on inventory that is available inother countries. The second is that I wouldn’t be surprised if, in thefuture, the role of technology becomes very important. For example,
3D printing could become very crucial to minimizing the impact ofdisruptions. This is because with 3D printing, you really don’t needto send the product – as long as you have the design and raw
materials, you can print it in your country. These could be roles fortechnology and digital in the future.
In this kind of situation, industrial policy becomes very important,because somehow the government needs to induce innovation. You
cannot rely entirely on the private sector for this. Maybe there is arole for government, for example tax credits for innovation tominimize supply chain disruptions.

Rules-Based Trade & Investment Regime
JS: You’ve mentioned two important things foravoiding disruption in global supply chains. One isdiversification, and the other is technology, and I
agree these are very important. One more thing thatmight be necessary, however, is a rules-based tradeand investment system. Private companies are very
concerned about policy unpredictability andunpredictable business situations. Rules-based
mechanisms could be very important for avoiding
this situation. What are your thoughts on this?

Basri: I couldn’t agree more. Being rules-based is very important,because that can help to ensure certainty. The main challenge forinvestors is always related to the issue of uncertainty. I think this isvery important, especially if you look at the case of the conflict
between Russia and Ukraine, for example; investors or countries needto ensure that there will be some kind of guarantee that supply chains
will continue and that agreements will be honored. You can see in thecase of the current situation, many countries are afraid of potential
issues from this kind of crisis. They may try to mitigate this issue by
issuing export bans – for food, for example. In the case of thevaccines, we also learned of vaccine nationalism where they banned
exports. This kind of situation, in game theory, is what economists
call prisoner’s dilemma. Every country focuses on its own selfinterests for the short term, but the best payoff would be fromcooperation in the future. That is why a rules-based approach is very
important for ensuring that the international order will be in place.
Otherwise, I am afraid there is a risk that many countries will start
to impose export restrictions. This would make energy prices andfood prices even higher, so I entirely agree with you that this is thekind of thing we need to work out. Unfortunately, I would say that weare in a situation where we desperately need global cooperation, but
the global situation right now is very fragmented, so we badly needcooperation but cooperation is not there. One way to solve thissituation is to bring back order, bring back certainty about beingrules-based as well, to avoid the uncertainty faced by many
investors.

Role of RCEP, CPTPP & IPEF
JS: As you mentioned, multilateral cooperation is very
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important, but unfortunately the WTO does not seemto be functioning very well in the area of trade andinvestment. Work is being done on several regional
free-trade agreements to supplement the functions ofthe WTO. In the Asia-Pacific region in particular,countries are very keen on the restoration of a tradeand investment regime. The RCEP, CPTPP, and IPEF
are three attempts that seem to stand out asframeworks for the restoration of a rules-based
international economic order. What is yourassessment on the possible contribution from theseregional mechanisms toward the restoration of arules-based international system?
Basri: This is also a very good and very important question. Let me
share my pragmatic view on this. The ideal one would be
multilateralism, exactly as you said. But I think we have to berealistic about the prospects for the WTO probably being rathergloomy. We have to continue to fight for this multilateralism, but as
you said, it may take some time for many countries to work this out
again and continue to make the WTO work. In this kind of situation,
therefore, we have two other possibilities because the prospect ofmultilateralism is still unclear. The second is unilateral; every country
going it alone to reform by opening trade. This would also be ideal,
but unfortunately, nowadays this is rather utopian in this kind ofworld. I can imagine many politicians asking why should we open
our economy when other parts of the world are imposing protection?
If a leader were to try to pursue unilateral reform, they probably
wouldn’t get political support. Politically, it will be very difficult toexpect unilateral reform.
Therefore, the in-between, most-plausible solution to this would
be open regionalism or regional trade agreements. This is exactly
what you said about the RCEP and CPTPP. The way I look at thesituation is that even though the ideal solution might bemultilateralism, this could be used as a kind of starting point forensuring that a rules-based framework is in place. As people feel thebenefit you gain more political support, then you move to the more
complex and difficult, more open; and then later on you can go tomultilateral. I think this is very important.
Let me be strong and honest with you. There is a feeling orconcern about geopolitical tension – not only between Russia andUkraine but also about the US and China. This may have an impact.
The trade war between the US and China will significantly affectmany developing and emerging economies, including ASEAN
countries. Somehow, we need to address this issue. Let me give an
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example regarding the RCEP, one of the trade agreements being
discussed. One of the important features of the RCEP, for example, isASEAN as a single entity. They position ASEAN as a hub. We
understand that it is not easy to deal bilaterally with economic
superpowers like the US and China, so they made ASEAN the hub –ASEAN plus China, ASEAN plus Japan, plus South Korea, plus theUS, and so on. This kind of model attempts to balance tension fromthe geopolitical perspective, while also ensuring that many Asiancountries benefit from trade. Similarly, with the CPTPP, for example,
the spirit is also to try to make sure that many Asian countries willcontinue to benefit. The difference is perhaps this issue of ASEAN asa single entity. I agree with you, however, that we have to be very
realistic and pragmatic. If we cannot achieve rules-based
multilateralism, then let’s start with something that can be done andwill still provide benefit and welfare to many Asian countries.
JS: I see. One additional question – what are yourthoughts regarding the IPEF? It’s an American
initiative, but appears to be lacking very importantelements including market access. Some countries
are therefore somewhat skeptical about this attempt.
What is your candid opinion of the IPEF?

Basri: I completely agree with you. When we look at a trade
agreement, we have to look at both perspectives – the supply side
and also the demand side. If you are talking about the demand side,
while it is true that this will provide benefits in terms of an overall
regional impact, we cannot forget the issue of the distributionalimpact as well. If you are talking about the effect of the distributional
gain, then we are talking about the self-interest question: “What’s in
it for me?” If the market access is not there, what’s the point of myjoining this trade agreement? Somehow, this kind of issue needs tobe addressed as well. One of the important features of the RCEP andCPTPP is the importance of market access, so that if a country looks
at this it can see that it can benefit if it joins. So I fully agree. I think itis also important to address this from the supply side, in the sensethat a country is able to participate, but will also ask “What’s in it forme?”

Role of APEC as a Soft-Law Approach
JS: In these circumstances, with increasing

uncertainty but when there doesn’t seem to be any
specific international organization like the WTO thatcan function well to achieve compromises amongmajor countries, a hard-law approach might notnecessarily be a good way to promote multilateral
cooperation. Instead, we may as well adopt a sort ofsoft-law approach. In that sense, how do you view therole of APEC? You mentioned the RCEP and CPTPP
as possible venues for achieving a rules-based
mechanism. An APEC free trade agreement could bebuilt up by integrating the RCEP and CPTPP, soAPEC might be a good venue for achieving
international cooperation.
Basri: I agree, and especially if you look at it in terms of coverage, interms of market access, that is one of the potentials. Of course, thebiggest question is that when you involve an organization that isnonbinding, it is always difficult to expect realization. The importantfeature of the CPTPP, and the RCEP, is that countries that participate
can expect a benefit. APEC is a very important organization but it’smore of a forum for dialogue. We could probably use APEC as theavenue, because the idea of the RCEP, for example, is quite similar
about open regionalism as well. Exactly as you said, in thesecircumstances where perhaps we cannot achieve the first, bestsolution, the ideal solution of the WTO, we have to find many venues
or avenues that can help us achieve open regionalism. At the sametime, don’t forget that our resources are also limited. If we getinvolved in too many trade agreements, our resources will bediverted as well. Therefore, it seems to me that this has potential, but
try to work it out on something that possibly will be on the table.
That’s one of the important methods.
JS: May I ask what you think about the peer review

aspect of APEC? It’s not binding, but there is peer
review.

Basri: We have to revitalize this peer review somehow, because eventhough it’s not binding, it can give pressure. Otherwise, it will be akind of situation where more items will be excluded so that thecountries can agree. If we can strengthen the role of this peer review
for cooperation, then maybe APEC can be effective.

Basri: This is a very important question, because I am speaking froman Indonesian perspective and Southeast Asian perspective. Let me
be frank and honest with you. There is this issue of geopoliticaltension about rising power in Southeast Asia, and the tension
between the US and China, for example. ASEAN countries are not ina position to choose between those two; we cannot afford to choose
either China or the US. This is because inevitably China is one of thelargest trading partners for many ASEAN countries. Japan’s role istherefore very important here, to provide balance. If there are more
options available for many ASEAN countries, that would besomething that would be useful for us, rather than having twoelephants in the room where we are in a very difficult situation.
Japan’s role here is very important, and I would expect that if
Japan could be more aggressive – perhaps that is too strong – interms of this investment cooperation and trade cooperation, I believe
there would be many ASEAN countries that would like to cooperatewith Japan. For a country like Indonesia, for example, we could
diversify and be a part of this production network. Automobiles arevery important, and Japan could play a very important role as part ofa global production network. If we could not only rely on China, forexample, like what happened during the pandemic, this would help toreduce somewhat, although it would not entirely eliminate, but
reduce and mitigate the geopolitical tension and diversify the risk aswell.
To me, cooperation with Japan is very important – it’s crucial.
We’ve experienced and witnessed the strong ties of Japanese
investment in the past. This has helped many countries in ASEAN,
for example, so I would hope that Japan could play a more activerole in the region. This would not only diversify the risk, it would also
help to minimize the geopolitical tension.
JS: Thank you very much for your time, we’ve learned

a lot from your remarks today.

ASEAN Expectations of Japan in Asia-PacificRegional Cooperation
JEF: As a final question, what do you expect from theJapanese government in achieving Indo-Pacific orAsia-Pacific regional cooperation?

Written with the cooperation of David S. Spengler, who is a translator andconsultant specializing in corporate communications.

Japan SPOTLIGHT • November / December 2022

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