When six air-to-surface missiles go missing a week before more than 20 world leaders, including George W Bush, are due in town, security is always likely to be an item high on the agenda.

That was certainly the case in Thailand in October 2003 when the country hosted the annual Asia-Pacific Economic Cooperation (Apec) meeting in Phuket.

Although the Thai government was sketchy on details of where the missiles had come from and unsure if they had indeed been smuggled into the country, the government took the threat seriously and security measures were heightened accordingly.

Happily, the meeting passed with no incident. But it provided a stark reminder of the underlying terrorist threat that is preoccupying the region.

“Since September 11, 2001, southeast Asia has come to be regarded as the second front for the global war on terrorism,” says Dana Dillon, senior policy analyst for south and southeast Asia at the Heritage Foundation, a conservative think-thank in Washington.

Terrorist bombings have taken place in Indonesia, both in Bali and in Jakarta, and police have seized bomb-making material in a number of countries in the region.

“Government and business leaders in the region have witnessed the US war on terrorism and now they are realizing that they too have problems in their own backyard. There is no question about it and they can’t ignore it,” says Bob Lees, the Honolulu-based executive adviser at consultancy firm Bearing Point.

Although last year saw the arrest in Thailand of Hambali, operations chief of the al-Qaeda-linked group Jemaah Islamiah, suspect terrorist cells continue to operate throughout the region. The threat remains pervasive.

But there is also an upside to the increased security focus. Among the most positive effects is the fact that shared terrorism concerns are forging closer regional and international cooperation at both a political and an economic level.

“Dealing with such [terrorist] threats demands close regional synergy and worldwide cooperation,” said Thailand’s prime minister Thaksin Shinawatra in his opening speech to Apec finance ministers in Phuket last October.

“As we have all worked hard to prevent wars and armed conflicts, we have to work much harder to fight these new challenges to our financial and economic stability.”

The Apec meeting in Bangkok provided a reference point. Although security issues were seen to supersede economic matters, such as liberalizing trade and investment, the meeting was also a useful barometer of political goodwill between the United States and the region.

“There is no question that terrorism has brought the importance of southeast Asia home to Washington. Since September 11, this administration is really looking out a lot more for friends,” says Lees.

“In the early days, unilateralism ruled the day, but that outlook changed and increased cooperation [between the United States and the region] is now part of the agenda.”

Lees points to president Bush’s six-day, six-country tour of the region, before and after the Apec 2003 meeting, as a good example. “This was unprecedented and clearly indicates America’s wish to convey the importance of the region,” he says.

Dillon adds that Bush’s visit to Indonesia, part of his whistle-stop tour of the region, was particularly significant: “Bush wanted to make it very clear that this is a war on terror and not on Islam. He was visiting the largest Muslim country in the world and he made a point of meeting with moderate Muslim leaders while he was there. Visiting Bali was also very symbolic.”

Adds economist and adviser David Hale, chairman of Hale Advisors: “In the absence of September 11, I do not think that we would have seen Bush visiting Bali.”

Unprecedented cooperation

Within the region there is also a thawing of diplomatic relations and increased cooperation in security issues.

“There has been an incredible increase in cooperation among these countries. I have been working in the region for 25 years and I have never seen anything like it,” says Lees.

Countries have worked together to form mutual legal assistance programmes on transnational crimes, extradition treaties have been put in place and joint working groups on terrorism have been organized. In 2003 Apec established the Counterterrorism Task Force, although its effectiveness as an institution has yet to be tested.

“There are certainly signs that the war on terror has tightened relations between these southeast Asian countries,” says Tim Condon, chief economist for Asia at ING Financial Markets. “There is undoubtedly more, and better, dialogue.”

“We have seen an increase in arrests of terrorists in each other’s countries and politically a lot of countries that never cooperated before are doing so now,” adds Dillon.

There is no doubt that this rebalancing of political relations within and outside the region is having a knock-on effect on its economies.

As US secretary of state Colin Powell said at the 2003 Apec meeting: “The United States does want to focus on security, but not as a separate issue. It is now an integral part of the development of Apec economies.”

The most obvious area affected is trade. Last year Singapore signed a Free Trade Agreement (FTA) with the United States, and, in October, the United States made a similar agreement with Thailand.

“The port in Singapore hosts a US military presence, albeit not officially. This tells you a lot about the level of cooperation between the two countries. It’s never been better,” says Condon.

Hale believes that military support offers the best explanation for the timing of the Thai FTA.

“If Thailand had not put troops into Iraq, then I do not think that the FTA with the United States would have proceeded so swiftly. It would have gone forward at some point, but not immediately,” says Hale. “If you support Bush’s Iraq policy then you are guaranteed better treatment. If you don’t, then you are not. Just look at what happened with Chile’s FTA.” (When Chile failed to support the United States in the Security Council vote on the resolution to authorize military action against Iraq in early 2003, the US administration delayed signing the trade agreement with Chile.)

“The United States has proposed a wide range of FTAs with Asean countries, but nothing immediate is planned,” adds Hale. “If the Thai FTA is a success it might provoke others. If there is a new government in Indonesia, then maybe they would think about a trade agreement to show solidarity and cement that relationship.”

There are signs that the region is also working together to form a more cohesive trading bloc, although to date this has been primarily at the instigation of Singapore and – to a lesser extent – Thailand.

In October, China agreed a free trade agreement with Association of Southeast Asian Nations states that should be in place by 2010. At the same time Japan agreed Comprehensive Economic Partnerships with Asean members, and these should be established by 2012.

Singapore’s prime minister, Goh Chok Tong, speaking at Apec 2003, said the agreements were “strategically important because they help to bring the northern and southern halves of east Asia together”. He added: “They are concrete steps towards the eventual realization of an east Asian Community.”

Says Lees: “It is fair to say that terrorism has caused closer cooperation and better communication, and that this has contributed to economic growth.”

Protectionism over free trade

But only up to a point, say others. Despite the increased regional cooperation, trade talks remain primarily focused on bilateral deals.

“Economically and intellectually, countries still don’t get it,” says Dillon. “In southeast Asia, with the exception of Singapore and, to a certain extent, Thailand, there is no intellectual or political force behind open trade. Even with elections fast approaching in many of these countries, you do not see free traders running for election. All the talk is focused on protectionism.”

Although this trend towards bilateralism is not attributable to terrorism, other areas of the economy have been hit by it more directly – notably levels of foreign direct investment (FDI) and the tourism industry.

“Terrorism is negatively affecting FDI,” says Lees. “Companies are much, much more careful about where they are putting their investment dollars. It is common sense that investment capital is going to go where it is safe and secure.”

Investors are certainly not feeling safe and secure about Indonesia, the country widely regarded as the riskiest in the region, where president Megawati Soekarnoputri is facing an election contest later this year.

“Everyone’s worry is Indonesia,” says Hale. “President Megawati is not such a strong leader, and the question, with elections due soon, is who might take her place. It is odds-on that she will survive, but you have to be concerned.”

“All the data show that the biggest loser so far is Indonesia, suffering falling levels of FDI and foreign [portfolio] investment since September 11,” he adds.

Malaysia has also suffered. “Malaysia has long underperformed the rest of the region in terms of attracting FDI,” says Condon. “There are a lot of reasons behind this, one of which is the threat of terror.”

An area of the economy more obviously suffering from the threat of terrorism is tourism. “The countries that depend on tourism are obviously suffering, like Thailand and Indonesia. The problem is that these countries are at risk from the perception of terrorism,” says Dominique Dwor-Frécaut, regional economist for Barclays Capital in Singapore. “Despite this, tourism figures do seem to be staging a significant rebound.”

Julian Jessop, senior international economist at Standard Chartered Bank in London, concurs that the terrorism effect is waning. “The sad thing is that people just get used to these events,” he says. “There is news fatigue, and tourist numbers are rebounding.”

Dwor-Frécaut likens the situation at the beginning of 2003 to the biblical Four Horsemen of the Apocalypse, with four factors conspiring to create a climate of fear: Sars, the war on Iraq, disintegrating relations between North Korea and the United States, and terrorism.

“Given all these factors, it is difficult to extrapolate from the figures what is directly due to terrorism,” says Don Hanna, Citigroup’s head of Asia Pacific economic research in Hong Kong. “But what we can say is that, despite these problems, overall growth in the region seems to be strong.”

According to World Bank figures, the region is one of the fastest growing in the developing world, with average growth for east Asia for 2003 forecast at 6.1%. This compares with a paltry 1.8% in Latin America.

A recovering US economy, historically low interest rates, stable inflation in the region and a stronger outlook for global growth are combining to create a strong base for economic growth in southeast Asia.

“As the US economy continues to increase in strength, Asean is one of the first regions to feel the benefit,” says Lees.

Downside risks include a weaker-than-expected US economy, a protracted implementation of fiscal and structural reforms in Asia, and a persistence of regional political tensions and vulnerabilities to external shocks and natural disasters.

But Lees remains upbeat. “I do not think that we will see the US economy doing anything other than moving forward, especially in an election year. Tax cuts have given the economy a significant boost and momentum is building,” he says.

“What might threaten this, from the point of view of east Asia, is if Sars returned in a significant way. But I do not think this is a likely scenario and, in that instance, both Hong Kong and Singapore seem vigilant and ready to deal with it.”