Not since the mid-1960s, when many regional governments were still battling communist insurgencies, has Southeast Asia faced such a potentially wide-ranging security threat. It couldn't come at a worse time. Well before the events of September 11, the region was enduring a slump in exports and a falloff in foreign investment as Western firms headed to China. Even Singapore's economy, the region's strongest, probably contracted by 2% in 2001, while Indonesia, the weakest player, is struggling to avert a new foreign debt crisis.
Now the region is being seen overseas as a breeding ground for international terrorists. The connections with Osama bin Laden may not be as strong as feared. But what's real and what isn't may not matter. Prevailing perceptions will "accelerate a trend of business turning away from Southeast Asia," says Robert Broadfoot, managing director of Political & Economic Risk Consultancy Ltd. in Hong Kong. Already, foreign businesses have stopped sending execs to the region to explore new opportunities, while companies are beefing up security at their offices and homes.
Clearly, the region's governments need to show the world they can keep the peace. That requires achieving a tricky balancing act: Authorities must provide adequate security to foreign firms without being alarmist and scaring them off completely. When Singaporean authorities invited foreign execs to a briefing on Jan. 18, they clearly hoped to calm nerves following the shocking revelation that the militant group Jemaah Islamiyah had infiltrated what is widely regarded as the most secure nation in the region. But when one exec asked whether his company was on a list of 200 potential targets, he was told: "This is on a need-to-know basis."
Also vexing for Southeast Asian governments is how to deal with U.S. offers of military assistance. Apart from the Philippines, which solicited American aid, other nations, especially those with large Muslim populations, cannot afford to make open appeals to the U.S. for help. Nowhere is this more true than in Indonesia, the most likely spot for al Qaeda to operate. Jakarta is resisting pressure from the Pentagon because it can ill afford a nationalist backlash. "Many national governments silently might condone the U.S. presence in the Philippines," says Victor Savage, head of the department of geography at the National University of Singapore. "But publicly they have a problem as the Muslim opposition will be very critical."
That said, Southeast Asia's ailing economies won't easily weather another round of investor disenchantment. As it is, foreign businesspeople are becoming increasingly jittery--even in Singapore and Malaysia, where authorities keep a tight lid on extremism. In Singapore, the American Club has barred parking out front and requested police patrols. At Kuala Lumpur's Petronas Towers, Southeast Asia's tallest buildings, McKinsey & Co. staff have done evacuation drills, while building management has installed X-ray scanners and metal detectors in the lobby.
Singapore and Malaysia at least have strong reputations with foreign investors to build on. That's not the case with the Philippines, where fragile government and endemic corruption have already been big investor turnoffs. In recent years, the investment climate has worsened with the rise of Abu Sayaaf, which has kidnapped and murdered foreign tourists and continues to hold an American missionary couple. "Until they take care of Abu Sayaaf," says Robert Sears, executive director of the Manila chapter of the American Chamber of Commerce, "the image of the Philippines will remain tarnished."
While Philippine President Gloria Macapagal Arroyo can afford to take a tough line with Abu Sayaaf, the administration of Indonesian President Megawati Sukarnoputri has no such luxury. Already beset with economic and political problems, Megawati is not in a position to order a crackdown. Nor is the army, still living down charges of human rights abuses committed in East Timor, keen to take the rap for breaking the heads of Muslim radicals.
Yet the perceived growth of radical Islam is clearly having a deleterious impact on the Indonesian economy. Citing growing instability, garment, footwear, and textiles importers in the U.S. and Europe are shifting their sourcing to safer nations. Says Sofjan Wanandi, tycoon and chairman of the private-sector Committee for Economic Rehabilitation: "They say: `We're not certain you can deliver because there's all these demonstrations and unrest."' Wanandi adds that a major U.S. footwear company is cutting orders from Indonesian factories by half this year to $500 million. He also estimates that the loss of orders at export-oriented plants will throw half a million people out of work in 2002.
To be sure, the weak global economy is responsible for some of the dropoff in orders. But the numbers make grim reading. Indonesian exports fell from $3.6 billion in October to $3 billion in November, a drop of 16% in one month, according to the Central Bureau of Statistics. Foreign direct investment plunged from $1.9 billion in November to $630 million in December.
Meanwhile, Indonesia's ethnic Chinese business community is feeling increasingly vulnerable. Shortly after the Singapore and Malaysian arrests this month, says Wanandi, the CEO of an auto assembling company was on the line shouting: "The radicals are growing! The government is not doing enough!" Like most Indonesians, Wanandi agrees that inviting in U.S. troops is politically impossible. He is calling instead for the Indonesian military to be given greater powers to crack down on militant groups. "There is a lot of competition between the army and the police," he says. "That's why a lot of bombing is going on. No one is being punished."
The trouble is, the foe is maddeningly elusive. But until the threat fades, Southeast Asia will have to deal with declining foreign investment, jittery expats, and, in Indonesia, rising poverty and instability--the very environment in which terror groups thrive. By Frederik Balfour in Hong Kong and Michael Shari in Jakarta