Southeast Asia's economic prospects will be framed by four major trends: lower global growth, demography, urbanization, and, most crucial of the four, the coming age of scarcities. Together they weave a new tapestry for Southeast Asia's future.

Global Growth

Over recent decades the world has enjoyed exceptionally high economic growth rates. There have been examples of high growth (like Britain at the beginning of industrialization, Germany around 1900, and the United States at the same time), but that was never global growth. Now millions all over the globe have been lifted out of poverty and gross domestic product (GDP) per capita has reached approximately US$4,000 for China — the most populous country in the world.

With this background it seems surprising, even astonishing, that lower growth looms ahead. The reason is that this high growth was fuelled by borrowing, which basically means that the present encroached into future consumption — this was especially seen in the United States with saving rates at around zero for the household sector over several years. In 2005 United States households were actually dissaving compared to a historically high savings rate of 14.6 per cent in 1975. At the end of 2011 the household savings rate was around 4 per cent.

(The much maligned eurozone managed a household savings rate of 13.9 per cent for the second quarter of 2011.)

The figures tell a disquieting story. After World War I global sovereign debt rose to 70 per cent as the major countries borrowed to finance the war. It fell during the interwar period when debt was at least partially paid back. After World War II it rose again and this time approached 100 per cent of GDP. Again it was paid back and in 1970 it was only 30 per cent of global GDP. Waters seemed calm, but over the recent decades when high growth opened opportunities for savings, countries should have saved to prepare for rainy days, but they actually did the opposite and borrowed to increase spending.

Economic growth in Southeast Asia slowed down in 2011 after the sharp recovery in 2010 from the global financial and economic crisis of 2008–9. A cooling down was particularly evident in the second half of the year. There was considerable uncertainty about how the European crisis would unfold, the prospects of a U.S. recovery, how much China would decelerate, and the future of oil prices.

In the political arena, the changes in Myanmar were the most striking. Reforms enacted during the elected government's first year in office under the new constitution exceeded the expectations of most observers. Less media grabbing, but still important, was the Singapore general election in May. It signified a more open and competitive political environment and more vigorous debate of government policies. There was little change in the political openness (or lack of it) in other countries in the region. The general election in Thailand made no difference to the continuing political polarization in the country. Indonesia was generally stable and attracted more attention as an investment destination. However, good growth rates masked continuing economic weaknesses and failure to protect religious minorities was also a troubling blemish. Democracy is not yet entrenched in strong institutions.

In Southeast Asia's interstate relations, the border conflict between Thailand and Cambodia stood out, demonstrating the role of narrow nationalism over wider ASEAN interests. Elsewhere interstate relations were generally amicable, though often not problem free. There are still many unresolved boundary disputes and border problems — both land and maritime — between Southeast Asian countries. Though mostly quiet for the moment, there is the risk of flare-ups if they are politicized within countries as happened in the case of the Thai-Cambodia border conflict.

The year also saw the United States announcing a shift of strategic focus from the Atlantic to the Pacific, or more precisely to the “Indo-Pacific” region, which includes both the Asia Pacific and India/Indian Ocean. This reflected the shift in global economic power towards Asia where America would want continued commercial access to sustain its own growth.

The Malaysian economy grew by about 5 per cent in 2011, which is less than the growth rate of 7.2 per cent registered in 2010, when the Malaysian economy rebounded from the adverse effects of the 2008 global financial crisis as a result of which the economy had contracted by 1.7 per cent in 2009. The recovery and sustained growth in 2010 and 2011 were driven largely by domestic demand and rising commodity prices as external demand for Malaysia's manufactured goods weakened.

The liberalized services sector, the manufacturing sector, the agricultural sector, and the construction sector made positive contributions to GDP growth in 2010 and 2011. However, the mining sector's contribution was negative in 2010 and close to negligible in 2011.

Although economic growth moderated in 2011, inflationary pressures built up because of supply shortages, rising incomes, and subsidy cuts for essential food items and fuel. The government tried to contain inflation by raising the interest rate and the statutory reserve requirements of banks, reinstating some of the subsidies for essential food items; and providing cash handouts in its Annual Budget for 2012. The government also attempted to stabilize housing prices by introducing cooling measures.

The trade balance was positive in 2010 and 2011 and this generated a positive current account balance. The inflows of capital also helped to generate an overall surplus in the balance of payments, which was reflected in the increased international reserves held by the Central Bank of Malaysia in 2011.

The banking system was sound with steady loan growth and a relatively high risk weighted capital ratio (RWCR) and core capital ratio. The bond market was active with Malaysia becoming the largest issuer of Islamic bonds. The stock market was vibrant but volatile because of the sudden inflow and outflow of foreign portfolio investments.

The government's fiscal deficit increased from 5 per cent to 6 per cent of GDP and the public debt as a percentage of GDP was 56 per cent in 2011.

Ageing Population in Indonesia

Japan has the highest percentage of older persons in the world. In 2010 its older persons (aged 65 and over) constituted a large percentage (22.7 per cent) of the total population, followed by Germany (about 20.4 per cent), and Italy (about 20.4 per cent). Clearly, in these countries, the ageing population (the process of a rising number and percentage of older persons) has created a tremendous financial burden for the society and government. Though the percentage of older persons is not as high as in these countries, Singapore already feels the pressure of a rapidly rising number and percentage of older persons, who formed 9 per cent of the total resident population in 2010. Older persons contributed 11.1 per cent of the total population in South Korea and 12.7 per cent in Hong Kong.

Many developing countries, including Indonesia, may not have faced the severe challenges of an ageing population such as in those countries cited above. Nevertheless, developing countries are confronted with a different set of challenges caused by their ageing population.

Indonesia has experienced a relatively fast decline in its fertility rate. Though its fertility has not been as low as in other countries, Indonesia has achieved replacement level fertility in 2010. Its older persons (measured by those aged 60 years old and over) were 7.6 per cent of the population in 2010, much lower than 14.1 per cent in Singapore in the same year, if Singapore's older persons are measured as those aged 60 years old and over. The percentage may look small, but it will rise to about 13.2 per cent in 2025, close to the condition in Singapore in 2010. Furthermore, in terms of size, Indonesia has 18 million older persons in 2010, very much larger than 0.5 million older persons in Singapore. In 2010 Indonesia had to feed this large number of older persons with per capita income of US$3,000, very much lower than US$44,790 in Singapore in the same year.

During 2011 the unresolved legacies of recent political conflict continued to overshadow prospects for reconciliation in Thailand. The pivot for the current troubles is the coup of 19 September 2006 when the army leadership, in concert with palace insiders, deposed the electorally successful government of Prime Minister Thaksin Shinawatra. The coup was designed to dismantle the Thaksin juggernaut and eradicate his supposedly malign, even dictatorial, influence from national life. The worry, both then and now, is that Thaksin can disrupt the careful plans — economic, political, royal, etc. — of other factions among the country's elite. Thaksin, with his telecommunications fortune and unique track record of marshalling electoral support, has been portrayed as the enemy of national unity. Since the coup there have been more than five years of jousting between Thaksin and his allies, on the one hand, and senior members of the military, Privy Council, judiciary, and bureaucracy on the other. In 2011 the ghosts of the 2006 extra-constitutional intervention, and the ineptitude and violence that followed, returned to haunt the coup makers. With the 2011 election there is a final popular verdict on the coup and its aftermath. It is a bleak one for those who had worked towards Thaksin's downfall.

Remarkably, Thaksin has survived. With the Pheua Thai Party's resounding election victory on 3 July 2011, and its leadership of the country's new coalition government, his ignominious exile from Thailand, and from official political activities, may be coming to an end. All efforts to purge him have failed. By a large margin, Thaksin remains the most electorally successful politician in the country's history and the events of 2011 reinforce his singular claim to a popular mandate. With the triumph of his sister, Prime Minister Yingluck Shinawatra, Thaksin is once again in a decisive position. And while Yingluck is commonly described as a “political novice”, and many doubt her abilities, she has proved a very effective proxy for Thaksin and his brand of politics.

The year 2011 started for the Philippines with a huge shock — the suicide of Angelo Reyes, a retired general and former Cabinet member of the administration of Gloria Macapagal Arroyo, as a result of a Senate investigation into corruption within the ranks of the Philippine military. The year ended on a rather sour and sad note, with the initial GDP figures showing the economy's lacklustre performance, tropical storm Washi (Sendong) wreaking death and devastation over major cities in Northern Mindanao, while in Manila an open political conflict had broken out between President Benigno Aquino III and the Chief Justice of the Supreme Court Renato Corona, threatening a constitutional crisis.

If at the end of 2010 the Filipino people held high expectations and high hopes for the six-month-old government of Benigno Simeon Aquino III, by the end of 2011 there was much more division in opinion about how his government was succeeding both in its priority agenda of good governance and in meeting the people's expectations of a stronger economy and a better life. And yet President Aquino remained favoured in public opinion polls, largely due to perceptions of his strong political will in going after his predecessor Arroyo, who stands accused of many wrongdoings committed during her incumbency.

Campaign against Corruption

The suicide of former armed forces Chief of Staff Angelo Reyes in February was an outcome of public revelations that he, along with two other former military chiefs, had been receiving illegal monthly kickbacks and a “send-off” kitty amounting to millions of pesos upon retirement from the armed forces. The exposé was incidental to a Senate investigation on military corruption initiated when two key witnesses — former military budget officer George Rabusa and former state auditor Heidi Mendoza — blew the whistle on military comptroller General Carlos Garcia who had amassed hundreds of millions of pesos and maintained properties abroad.

Allegations of large-scale corruption in the military are highly sensitive in the 120,000-strong armed forces, whose troops have for decades been battling communist and Muslim insurgencies aside from terrorist threats, with little resources for the basic needs of the soldiers and their families.

I am pleased to present the thirty-ninth edition of Southeast Asian Affairs. Like past issues in the series, this review of political, economic, and security developments in Southeast Asia in 2011 contains both Southeast Asian and outside perspectives of Southeast Asia. It is designed to be easily readable yet in-depth, informative and analytical. Southeast Asian Affairs has become a useful guide to all those, both specialists and non-specialists, who seek to understand Southeast Asian dynamics.

The year 2011 saw some slowdown from the strong economic growth in the previous year, but generally Southeast Asia as a region still did well. Perhaps the major political surprise was the rapid pace of change in Myanmar which saw ministers, officials, and businessmen from many countries scrambling to the country to assess the prospects and opportunities. Tensions in the South China Sea subsided somewhat in the second half of the year, though it was not clear if this relative calm would continue in 2012. ASEAN had an active year under Indonesia's Chair: among other things, it mediated in the Thai-Cambodia border conflict; held the expanded East Asian Summit with U.S. and Russian participation for the first time; and, in a vote of confidence in the reforms under way in Myanmar, agreed that Myanmar should chair ASEAN in 2014.

I would like to thank the authors and the editors, as well as others who have, in one way or another, helped to make this publication possible. The contents of this volume represent a wide variety of views and perspectives. Needless to say, the authors alone are responsible for the facts and opinions expressed in their respective contributions, and their interpretations do not necessarily reflect the views of the Institute.

The issue of the resolution of the ethnic problems of a quintessential multicultural state like Myanmar is the most important, continuing, and contentious issue facing the “Union” of the Republic of Myanmar — a “union” more in name than actuality since independence. Over the past two decades, however, international attention has generally concentrated on negative political issues and human rights abuses. Continuation of authoritarian direct and indirect military rule has been evident since 1962, causing considerable international indignation since the suppression of the people's revolution and the subsequent coup of 1988, the junta's neglect of the results of the 1990 elections, the attack on Aung San Suu Kyi's entourage at Depayin in 2003, the “Saffron Revolution” of 2007, and government procrastination on Cyclone Nargis relief efforts in 2008. The political incarnation of that state under an elected government in 2011, based upon the constitution of 2008 that was approved through a manipulated referendum, ensures that essential power still remains in military hands in what the Burmese leadership has called a “discipline-flourishing democracy”.

Although political rights are obviously important and human rights abuses abhorrent, the more basic issue concerns questions of the distribution of power and authority in a highly culturally diverse state in which the minority groups are generally on, or close to, the frontiers of the state — frontiers that are unrelated to ethnicity or cultural homogeneity. These ethnically arbitrary borders fragment peoples with shared ethno-linguistic traditions but ostensible loyalties to other states. As a consequence, even cultural diversity, let alone an absence of quiescence or ethnic oriented or fomented rebellions at home, have international repercussions within the region and beyond. If violence is its ultimate form, smuggling, illegal migration, trafficking, unauthorized investments, and the narcotics trade are possible or actual implications. Irredentism in western Myanmar on the Indian frontier among the Naga has been evident. If Western states are more concerned about human and political rights, Myanmar's neighbours (China, India, Thailand, and Bangladesh) are preoccupied with border tranquility and the adverse potential for refugees into their states — the potential external effects of internal Myanmar ethnic nationalism, rancour, rebellion, or disputed identity.

The year 2011 in Timor-Leste was marked by the national leadership's growing confidence in the governance of the country's challenging institutional and political affairs. This confidence, which is essentially about the ability to demonstrate sovereign state identity, has developed against a background of compounding tensions between the Gusmão-led Parliamentary Majority Alliance (AMP) government and the UN mission (United Nations Integrated Mission in Timor-Leste, UNMIT) and the flow of increasing offshore petroleum revenues over the past few years. It has been manifest in the emphasis Timorese leaders placed on different platforms throughout 2011 on three key policy objectives prioritized in the context of a broader nation-building process: phasing out the foreign military and civilian presence; joining ASEAN (Association of Southeast Asian Nations); and setting a model for “post-conflict” development. A most recent example of this approach can be noted in Prime Minister Xanana Gusmão's speech in September before the UN General Assembly, where he proudly cited the national petroleum fund's $8.9 billion balance to “transform Timor-Leste from a low income country to an upper middle income country” over the next two decades by maintaining the recent high economic growth rates.

Indeed, Timorese political leaders, enabled by a bourgeoning oil and gas wealth, have already acted in considerable autonomy from the UN mandate. This is evident in the fields of justice and security sector reform, where the Gusmão government has largely ignored UNMIT's advice on clearly delineating the roles of the military and the police, and establishing accountability for the crimes committed during the 2006 violence. Already marginalized from the political process, the UN mission is planning to pull out following the completion of the presidential and parliamentary polls in 2012. The drawdown of foreign troops and civilian support staff signifies the political leadership's claim for Timor-Leste's transition from conflict to development. It has also constituted a significant component of the government's efforts to allay the objection of some ASEAN members to the admission of their small and still institutionally weak state.

A Challenge for ASEAN

Tension between Thailand and Cambodia that escalated into armed clashes in 2011 did more than threaten the credibility of the Association of Southeast Asian Nations (ASEAN). The fighting over their disputed border, which claimed dozens of casualties and displaced tens of thousands of villagers, exposed a little-recognized weakness in Southeast Asia: countless border disputes and other land and maritime boundary issues that linger unresolved. While regional attention has focused on China's provocations in support of expansive claims in the South China Sea, Southeast Asian governments have ignored many of their own border problems.

Although these disputes are largely dormant, and there is no indication that they will flare into violence anytime soon, the Thai-Cambodian experience demonstrated the potential danger. In 2008, the two countries signed up to develop jointly the ancient, borderline Preah Vihear temple as a symbol of their “long-lasting friendship”, only to open fire on each other over the matter a few months later. Many of the latent disputes carry similar historical baggage and are susceptible to the kind of nationalist manipulation employed by conservative Thai political factions to whip up sentiments against Cambodia. Moreover, as with Preah Vihear, the core of almost all the disputes is sovereignty, which is emotionally charged and sensitive.

The resort to arms over a long-standing territorial disagreement is further evidence that borders, far from becoming redundant as globalization advances and consolidates, are being guarded more zealously than ever. It is also a stark warning that ASEAN's historical stand of deliberately shelving territorial disputes in the interests of regional cohesion and harmony is no longer valid. Years of institutionalized interaction and enmeshment in a multilayered and multitracked web of cooperation failed to produce “restraining effects” on members tempted to use force to settle differences, long an article of ASEAN faith. While a case can be made for ASEAN to review its entire approach to conflict resolution, the association also needs to change its attitude to boundary disputes and border issues that may disturb the peace in the first place.

Brunei Darussalam's concern about addressing an array of issues was evident throughout the year. While none were uniquely pressing, most were of ongoing interest that prompted the leaders’ efforts in engaging the society towards realizing the long term goals of Wawasan 2035, Brunei's vision for national development by 2035. Although progress towards the vision was slow, results showed incremental achievements. As a hereditary monarchy, and with the absence of a contested and confrontational political environment, Brunei's national emphasis is on economic, social, and spiritual goals that can be pursued congenially.

Nudging the Economy Forward

The government has never been more serious about economic development in order to decrease Brunei's dependence on the sale of crude oil and gas. It is assisting the participation of the private sector and promoting the education and training of youth to equip them for relevant employment opportunities.

Brunei's policymakers are naturally concerned by the usual poor grades the country receives from such global studies as the World Bank's Doing Business report or the World Economic Forum's Global Competitiveness Report. Nevertheless, Brunei's overall ranking has improved over previous years, aided by high scores on such indicators as macroeconomic environment and political stability. The World Bank has classified Brunei in the high income category as it has a gross national income per capita of about US$31,000, yet its other indicators lag behind high-income economies in providing relevant and sustainable regulations for creating an attractive business environment. These findings have generated various local views and reviews by those in the public and business sectors. An initiative from the Ministry of Industry and Primary Resources stated that a single portal for business applications was in the pipeline that would eliminate the current practice of seeking approval from thirteen different agencies. The new procedures were expected to be ready by late 2011. Another concrete improvement came from the Municipal Board to speed up approval of applications for business enterprises.

Foreign direct investment (FDI) has long been a crux catalyst of impressive economic and industrial development in Thailand. It not only brings in capital resources and job creation but also offers new technology, knowhow, and managerial and organizational expertise, among others, to domestic industries vis-à-vis backward and forward linkages. Due to this reason, Thailand's economic development strategies have zeroed in on ushering in FDI since the 1980s. Even though the strategy that positioned Thailand as a regional host of FDI with low production costs and a rich source of relatively skilled workers has proven to be successful as it fuelled remarkable economic growth, the rapidly evolving business environment in the world highlights the erosion of Thailand's competitiveness. This was particularly evident in the aftermath of the global economic downturn in 2008–9, thanks to escalating labour costs, the rise of China and India, and chronic political unrest, in addition to the recent floods caused by poor infrastructure and flawed water management. These recent developments suggest that the conventional FDI strategy Thailand has adopted will soon reach its limits in providing the pace of economic growth and industrialization the country once experienced.

Against this backdrop, this chapter attempts to take stock of FDI, both inward and outward, in Thailand and assesses its potential and performance. Although the global economic crisis in 2008–9 negatively impacted the prospect of foreign investment in Thailand and spurred a sharp reversal, the recent developments witnessed a resurgence of inward FDI which has by and large set the stage for Thailand's robust economic recovery. Concurrently, firms headquartered in Thailand have also emerged as global investors. The recent trend of outward FDI flows from Thailand highlights that Thai firms have increasingly started to depart from their comfort zones, explore new business opportunities, and thrive on synergies and complementarities with new partners by venturing overseas. Nevertheless, several drawbacks and challenges remain and critically hamper the country from fully exploiting its massive potential.

The year 2011 was a highly eventful and successful one for Laos' economy, politics, and foreign relations. Nonetheless, some significant challenges remained, including continued poverty, the negative impact of foreign investments, and the rise of transnational crime. In order to analyse these events, inter alia, this chapter contains three sections. The first section examines the state of the economy and the country's road map towards development. In the process, the section also outlines the major events concerning trade, investment, and aid. The second section examines developments concerning the evolution of politics in Laos together with the associated challenges of weak state capacity — particularly in the security sectors. Therefore, the section also includes an analysis of the country's desire to consolidate the rule of law, challenges to the rule of law, and various aspects of human security. The final section studies the foreign affairs of Laos — both bilateral and multilateral. While Laos has a long way to go in terms of its political institutions, the level of development, and the provision of human security, it is important to acknowledge that is has already made significant progress in rising above the ashes of its tumultuous past. In the process, the Lao Government has secured political stability (where there is no credible challenge to its continued governance) and it has firmly integrated itself as an active and responsible member of international society.

The Economy: Natural Resources and the Challenge of Equitable Development

Laos is a mid-sized landlocked country with a population of just 6.48 million and an economy of US$7.9 billion (2011 real GDP). While economic growth reached an impressive 8.3 per cent during 2011 (real GDP), inflation remained relatively high at 8.7 per cent. Much of the growth in the economy during the past six years (averaging 8 per cent) has been spurred by mining and hydropower exports. These two industries have also attracted significant increases in the level of foreign direct investment (FDI) from countries such as China, Thailand, Australia, and Vietnam. For example, by mid-2011 Vietnam had overtaken China as the country's biggest investor through a total of US$3.3 billion via 200 projects.

This chapter first provides an analysis of appointments and elections at the 11th National Congress of the Vietnam Communist Party (VCP), which was the main event on the political stage in Vietnam in 2011. It is followed by a discussion of the revision of the Party Manifesto, the first revision in twenty years; the National Assembly elections; the major economic issues; and some foreign policy developments.

11th Party national Congress

Attended by 1,337 delegates who represented 3.6 million party members and 54,000 Party cells, the 11th Party National Congress of the Vietnamese Communist Party (VCP) was held from 12 to 19 January 2011. The Party National Congress is held once every five years and serves as the lighthouse of the Party in two senses. First, it passes the policies proposed by the Party leadership that are embodied in Party documents, such as the Political Report, and the Five Year Socio-Economic Plan. Second, an election for the top office holders of the Party for the next five years takes place.

Perhaps it is useful to understand how the Party leadership is elected and works. First, the Party National Congress elects a new Central Committee, which acts as the Party's policy-setting body in between the national congresses. Membership in the Central Committee comprises the elites among Party members; only the top officials of a particular ministry or sector (usually from Vice Minister and leaders of provinces and above in ranking) are nominated for election. The Central Committee would in turn elect a Political Bureau, and its top leader, the General Secretary. During its five-year term, the Central Committee meets twice This chapter first provides an analysis of appointments and elections at the 11th National Congress of the Vietnam Communist Party (VCP), which was the main event on the political stage in Vietnam in 2011. It is followed by a discussion of the revision of the Party Manifesto, the first revision in twenty years; the National Assembly elections; the major economic issues; and some foreign policy developments.