APEC - The next ten years

Australian APEC Study Centre Issues Paper 16

APEC - The next 10 Years

Alan Oxley Chairman, Australian APEC Study Centre

Summary

Nineteen ninety-nine marks the tenth anniversary of APEC. Like all new ventures, the organisation has had impressive successes and some failures. APEC has a natural vocation to be the regional economic institution for the Pacific Century. APEC's focus should be broadened to promote free markets rather than free trade. Its institutions need to be brought to organisational maturity to serve this broader goal.

Lessons from the first decade

APEC's growth within the first decade has been impressive. Starting from a meeting of Foreign and Trade Ministers among 14 countries in 1989, it is now an organisation which supports an annual summit of 21 heads of Government including the USA, China, Japan and Russia, and hosts annual meetings of ministers covering at least 10 different subject areas. The work program of the organisation is voluminous. One of the major goals of the organisation was liberalisation of trade and investment. These were set out in the Bogor Declaration. Efforts to develop an APEC-based program of liberalisation to implement it have not been successful. What lessons are there to draw from APEC's experience which can inform thinking about directions in the future?

Why did the organisation grow so quickly? The basic reason is that it filled a gap. The institutions to manage global and regional affairs had been established after the Second World War and reflected the Atlantic Order. Until about 1970 the economies of the United States and Europe dominated the global economy. At century's end Asia held a significant share, altering the global pattern of production trade and investment. This was a trans-Pacific phenomenon. Trade between the United States and first Japan and then the other Asian economies was a critical element of the rise of the Asian economies.

APEC reflected the interests of the new economic order. There was no other place where the Pacific economies could meet to discuss issues of common interest where that interest was the dominant interest. Notwithstanding the short-term impact of the Asian currency crises and recession in Japan, Asia's share of global economic activity is expected to increase.

APEC therefore gave political expression to the new economic reality. The interest in doing this was stimulated in the late eighties by the development of the Single Market program by the European Community and the negotiation first the Canada/US Free Trade Agreement, then the North American Free Trade Agreement. There was anxiety that arrangements in Europe and North America might exclude Asia from world trade. There was no desire for a free trade agreement among APEC economies, but there was a desire by members of APEC to act collectively to assert and advance their common economic interests. The first thing required was a forum which demonstrated the rise of Asia. This was a political need. This need has been both the driver of APEC and at the same time a weakness.

Lesson One - Politics has transcended substance

The enthusiasm in APEC to take political positions on economic matters of common interest was great. This is illustrated in the case of the Bogor targets. These were ambitious targets. They are realistic if treated as general objectives¹ . So far so good. Setting the targets was effective use of APEC as a political forum to advance economic issues. APEC members also agreed to help accelerate the conclusion of the Uruguay Round and gave strong support to the negotiation of the Information Technology Agreement in the WTO.

The keenness to meet has been greater than the capacity to develop substantive programs. APEC members got ahead of themselves in trying to set up within APEC a program of liberalisation to achieve the Bogor targets. No other group of countries has ever voluntarily reduced trade barriers in the manner proposed, so why was it thought governments might do inside APEC what they have not done outside it is not clear. Japan clearly demonstrated the point at the Leaders Summit in Kuala Lumpur when it refused to endorse the EVSL packages. The writing was on the wall for all to see in the poor result achieved in the effort the year before to develop a voluntary liberalisation program in the IAP procedures. It was a case of political enthusiasm overwhelming sound public policy thinking.

We can see the same phenomenon at work in the work programs of the APEC Ministerial working groups. A quick review of the work programs endorsed by Ministers in the Transport, Small and Medium-sized Enterprises, Human Resource Development, Science, Sustainable Development, Telecommunications, Energy and Tourism working groups, for example, reveals that the desire to do something is stronger the capacity of officials to identify concrete work targets. There are a large number of programs which repeat work done elsewhere; are not coordinated with related work in other APEC working groups and other organisations; and have nebulous purposes.

Lesson Two: The need for APEC is real

Despite the somewhat contrived character of a lot of work in APEC programs, real issues have forced their way onto APEC agendas. Until the Asian currency crisis, one of the most important was the need to improve delivery of infrastructure. This issue achieved a strategic focus at the Vancouver Summit, and no wonder. The World Bank and every other international development institution with interests in the region has been pointing out for years that there is a desperate shortage of infrastructure in the Asian region and that at some point this will seriously impede development; and that the only way to satisfy demand is through privatised infrastructure. Even so, the focus on this issue in APEC has been diffuse.

A much more serious short-term issue is the weak capacity of a number of economies in the Asian region to manage their financial and monetary sectors. The Asian currency crisis squarely put this issue on the table and it has been the most important subject worked on by APEC for two years. The set of activities put in train in APEC to address the problems caused by the Asian currency crisis was impressive. Most of the work was done by the APEC Finance Ministries. Until this point, the APEC Finance Ministers had not played a very significant role in APEC affairs. There is a lesson in this.

Lesson Three: The strategic focus of APEC has been narrow

APEC was established to promote economic development among its member economies. It was set up not to reflect the traditional focus on "development" issues, but rather to identify ways in which members could collectively advance the common economic interest. It emphasised the role of the private sector and, from the outset, supported trade liberalisation.

APEC was set up by Trade and Foreign Ministers, not Finance Ministers. APEC is accordingly structured in such a way that the central operational bodies of the organisation - the "Senior Officials Meeting" and the ministerial forum to which it reports are bodies staffed by officials and ministers from Trade and Foreign Ministries. The inevitable result has been that the strategic focus of APEC has been on trade and trade related issues. This is the only activity where trade officials have responsibility which bears directly on economic development.

The consequence is that the extent to which the question of removal of trade barriers and the benefits to secured from trade facilitation permeates the work of the Ministerial Working Groups in the non-trade areas is odd. It has narrowed and even distorted the focus of the work of some of the groups. Broad economic issues have not been the business of APEC. The ministries responsible for these issues were not active. The strategic direction of APEC made no room for them and they did not seek it.

Initially, finance ministries showed little interest in APEC. For several years there were no meetings of APEC Finance Ministers. It is well known in government circles throughout the world that finance ministries prefer to keep to themselves. When they did ultimately start to meet, they kept somewhat to the sidelines, until the Asian currency crisis, anyway. At the Vancouver Summit the Leaders asked Finance Ministers to develop programs to address the currency crises. Since their actions were to be reported to the Kuala Lumpur Summit, one might have reckoned on their meeting immediately prior to the Summit. They didn't. The traditional practice of the Trade and Foreign Ministers meeting on the eve of the Leaders' Summit continued. The collective thinking of Finance Ministers was conveyed by report from their meeting some months earlier.

Lesson Four: The Leaders' Summit is APEC's most important forum

Leaders' Summits have become a more common phenomenon in international life, but there is still none that matches the APEC Summit for the importance it has in the Pacific Rim. There was no other place where the leaders of those countries could have met collectively to consider the Asian currency crises. There is no other place where a regular opportunity is created for Heads of Government to meet so many others in such a short time.

The Summit is what gives APEC its momentum. This creates problems as well. There is the inevitable pressure to produce a "result" from the meeting. Heads of Government, or more particularly political advisers to them, stress that any public activity requires "a result". In part this pressure encouraged the idea that early results in trade liberalisation were necessary.

Lesson Five: The administrative base is weak

From the time APEC was established, there was a bias against institutionalising the body. There were three reasons. There was genuine interest in not creating yet another international bureaucracy. There was the traditional North American concern over the difficulty of getting funding for new organisations. Finally there was interest, admittedly only among a small minority of members, to restrict development of APEC.

This had three impacts. The APEC Secretariat is very small. It has only just over 20 members. All are on loan from Governments. None are independent or permanent appointees. Second, the secretarial work for the Ministerial Working groups and their supporting groups of officials is carried by government agencies of APEC countries, not the APEC Secretariat. Individual APEC members provide the secretariats for working groups. Third, the central APEC budget is small, and in working groups, projects are often funded by individual APEC members.

There are two systemic consequences of this. First the management support from the APEC Secretariat is below the standard of first class international organisations. There is no capacity to give Leader's strategic advice on the organisation. Projects are often mounted haphazardly, frequently underfunded and poorly managed. This is not the fault of the Secretariat; it is the natural consequence of being asked to do too much with too little. The APEC Secretariat is simply not resourced adequately to do what it should with the appropriate level of professionalism.

The second is that programs across working groups are uncoordinated, overlap with work in other areas and frequently dispersed across a wide range of issues. They often seem unconnected to the organisation's general priorities. This is not surprising. If funding is not approved and controlled at a central point, there is no capacity in the organisation to check that the funded activity supports the broad policy objectives of the organisation. Frequently, projects in working groups are mounted because one or two delegations have offered to fund them, not because the project naturally stems from an agreed objective.

Charting APEC's Direction in Future

The tenth anniversary provides an opportunity to look at APEC's future and at what direction the organisation should move in future.

APEC's natural vocation - promoting free markets rather than free trade

The future of economies in APEC depends upon development of effective free markets in the region. This will maximise the opportunities for growth, increase prosperity, raise standards of living and improve security: nations that are prosperous and interdependent usually live in peace.

APEC's capacity to encourage the effective operation of markets among member economies is needlessly constrained by the tendency to date to focus on trade liberalisation. There is more to do than reduce trade barriers to get markets working efficiently. It would more effective if APEC deliberately adopted the strategy of becoming an agency to promote free markets, rather than just free trade.

There is a myriad of areas where joint policy work could assist in providing policy solutions. The Asian currency crises have identified an immediate set of needs, for example: develop more effective systems to manage monetary and financial sector policies; create social safety nets to deal with economic adjustment; and create more effective frameworks for business law.

From the wider standpoint, the broader goal is to get markets to function better. Removing trade barriers is important. But in a number of economies there are greater impediments to the effective operation of the market than trade barriers. These include restrictive business practices, cartels, controls on distribution and monopolies. There are concrete policy problems such as how to establish privately-owned infrastructure and improve competition law.

Sticking to political support of free trade

There is no need for APEC to try to become an operational agency. It should stick to policy advice and lend its political weight to policy solutions. Nowhere is this clearer than over trade liberalisation. APEC has been effective in setting targets. It was more than adequate that each member state adopted the Bogor targets as end targets for domestic policy. These can be realised elsewhere, particularly in the WTO. The Organisation is purpose-built for trade liberalisation. APEC has demonstrated the futility trying to become an operational agency to secure trade liberalisation.

The effective strategy now is for APEC members to secure the Bogor targets as negotiating objectives for the forthcoming WTO round of trade negotiations. This makes far more sense than trying to have the EVSL objectives adopted by the WTO. The EVSL were second and third best targets. They were compromises for partial liberalisation because there was no binding requirement in APEC for members to liberalise. Because they are partial liberalisation targets, they are unsuitable for the WTO.

Mainstreaming macroeconomic policy advice

If APEC seeks to move in this natural direction and broaden its perspective to macroeconomic policy to promote free markets, there is an organisational hiccough. The policy instrument through which free markets are facilitated is macroeconomic policy. In all APEC administrations, economic policy is the responsibility of finance ministries or economic planning agencies, not trade or foreign ministries. For APEC to make this shift, finance ministries and economic planning agencies need to be brought into the mainstream of APEC's policy structure.

In no other area of international activity is it effective for foreign and trade ministries to handle macroeconomic policy issues. In APEC, finance ministers should meet on the eve of APEC Summits, in parallel with meetings of foreign and trade ministries. If it could be achieved, it would be better if foreign ministries played a supporting, rather than a leading, role in APEC activities.

Becoming a more complete policy vehicle

The Asian currency crises have illustrated that economic reform to achieve more effective free market economies frequently requires political reform. The Philippines had demonstrated this before the Asian currency crisis, but it was not regarded as a norm in Asia. It had become something of a norm in Latin America the decade before. In many Latin American economies, more democratic political systems had to be introduced before market economies could be developed. This is noted not for the purpose of arguing that APEC should have a forum to discuss political issues. APEC already has one - the Leaders' Summit. The point to make is that to fulfil the organisation's role, discussion of political matters related to economic development is now necessary.

In order to enhance its utility for the purpose of increasing the effectiveness of market economies, APEC should also be prepared to broaden its scope to include consideration of social issues which are related to the capacity to achieve market reform. The APEC trade committee has made a very limited attempt to look at the question of how to sell trade liberalisation. This matter can never be taken very far by trade officials because the concomitant policy matters are outside the area of competence of trade officials. It is fundamentally a whole of government issue. If APEC is to help governments with these issues, it needs a forum where consideration can be given to the social policies, such as employment safety nets and health and safety standards which are necessary to support the processes of economic reform. This area is one of the largest areas of need across developing APEC economies.

Creating institutional coherence

APEC needs to be brought to organisational maturity. If APEC members did not want the organisation to function effectively, they would ensure that its secretariat had no permanence, that it was small, that the organisation was starved of funds and that there was no effective central co-ordination. The lean style of organisation that was created for APEC was suitable when it was set up. Its functions were limited and there was hesitation about what sort of organisation it would be. The organisation has evolved in way in which it has entirely outgrown this lean and simple structure.

No other international organisation and no ministry of state in any APEC member works with the sort of structure given to the APEC Secretariat. APEC's ministers need to ensure that the policy misjudgment they made about what sort of institution was necessary for secure trade liberalisation is not made again over what sort of institutional structure is necessary for effective and efficient organisational management.

Until this is done, the disconnect between what Leaders want and what officials can deliver will remain. So will the overlap of programs in working groups and the tendency to mount programs that are unrelated to organisational priorities.

Taking the circus out of the leader's summits

The political culture which requires each leader's summit to be an "event" and which creates pressure to create a communique or action plan named after the city in which it was held has to end. In most countries, attendance by the head of government at a summit with the heads of most important trading partners, or the leaders of most of the world's most important economies is justification enough. For host governments, the hosting of the summit is occasion enough. In most members of APEC, hosting meeting once every 20 years of over 20 heads of government, including the USA, China, Japan and Russia is event enough, without an "action plan" or "Declaration" having to be concocted. Who remembers what the Osaka and Manila Action Plans said? This is all very sensible, but it is probably the most impracticable idea set out in this paper.

An institution for the Pacific Century

APEC will continue and thrive. The combined dynamism of growth in Asia and Latin America and the dramatic changes in competitiveness which the information economy is forging in the United States, as well as the emerging power of China and the attendant effect that will have on great power relationships, will ensure that the twenty-first century will be the Pacific century.

APEC is the only body in which they are all the key members. With the Leaders' Summit, APEC has a body which will deal with political and economic issues alike as they arise. APEC is the natural institution of the Pacific Century.

In the way that APEC filled a political void over the last decade, it will fill the policy void which is growing wider as we move into the next decade. Even if officials and Leaders are not very good at anticipating strategic needs, when they are grave and demanding enough, these issues will force their way onto the policy agenda. The example is the way APEC responded to the currency crises.

Even so, APEC can be made more effective. APEC needs to be developed to be able to better serve the needs of its members in the future. It is time to redefine its natural role and convert a temporary structure into a fully functioning organisation which is resourced and structured to support that natural role

May 1999

This paper is based on a presentation made to the APEC Study Centre Consortium Confernce "Towards APEC's Second Decade: Challenges, Opportunities and Priorities" held in Auckland 31 May- 2 June 1999

Endnote
1 It is impossible to conceive of those industrialised APEC economies with heavily protected agricultural sectors reducing protection of agriculture to zero by 2010. But it is conceivable that their average tariff barriers, currently around 6 percent, could come down close to zero by 2010, leaving some isolated pockets where protection will be higher. In the same way, it is also conceivable that average tariff barriers for developing members of APEC, currently between 15 and 20 percent, could come down close to zero by 2020.