Towards a single market: Moving to the next stage of regional integration

As chair of ASEAN for 2015 Malaysia is expected to announce the adoption of the ASEAN Economic Community (AEC) – even if not technically complete – highlighting its own progress in liberalisation to give new impetus to the next stage of regional integration.

Progress 

The latest scorecard on the adoption of AEC measures from the 10-member group shows only two-thirds of the targets have been met. The scorecard does not show compliance at the country level or explain the reasons for the failure to meet the targets, but Singapore and Malaysia are thought to have made the most progress. “Malaysia has done well on key aspects including government policies, regulatory procedures and cross-border trade facilitation,” noted Rauf Rashid, country managing partner for Ernst & Young Malaysia, in an April 2014 report. “With Malaysia’s chairmanship of ASEAN in 2015, we hope to see Malaysia in the forefront in enhancing the sharing of best practices and experiences across member states.”

Due for adoption in December 2015, the AEC targets four key areas: a single market and production base, a highly competitive economic region, equitable economic development and integration into the global economy. One of three pillars of the ASEAN Community – the others being political-security and socio-cultural – the AEC was conceived to show regional and international businesses that the bloc was able to move beyond the ASEAN Free Trade Area (AFTA) in 1992 and commit to building a more harmonised South-east Asian community with effective regional institutions.

The AEC’s goals dovetail neatly with Malaysia’s own reform agenda, known as the Economic Transformation Plan and launched by Prime Minister Najib Razak in 2010. The transformation is designed to generate investment in 12 key areas, including health care, oil and gas, and transport, helping to turn Malaysia into a high-income economy by 2020, creating more than 3m jobs and lifting per-capita income to $15,000.

A set of strategic reforms are also part of the package and aimed at building a more competitive business environment including increasing the efficiency of public services and rationalising the government’s role in business, among other things. “We now enter the midpoint of the 10-year national transformation journey in a position of strength,” wrote Idris Jala, CEO of the Performance Management and Delivery Unit ( PEMANDU), on his website in May 2014. PEMANDU is leading the reform and Idris has a seat in Cabinet, as an indication of the significance of the project. “In the last four years, we reached milestones in catalysing the economy – growing income, jobs and investment.”

The reforms have also helped Malaysia move steadily up the rankings of the World’s Bank’s “Ease of Doing Business” report – to sixth position in 2014 compared with 21st before the overhaul began. Reflecting that increasing maturity, services is forecast to contribute 61% of GDP by 2015, with an increasing proportion of investment from foreign sources.

Reduced Tariffs

On paper, the AEC’s plan to create a single market and production base means reducing trade barriers to a minimum while encouraging the free flow of labour, investment and capital. To ensure the region is more competitive, governments need to improve competition policy and protection for consumers, and strengthen intellectual property rights.

The five founding members have reduced tariffs, as required under AFTA, to almost zero. They have also implemented so-called national single windows to facilitate trade and are negotiating a number of free trade agreements (FTAs) with other Asian nations as well as further afield – the Regional Comprehensive Economic Partnership, which would group together ASEAN’s 10 members, as well as the six countries with which it has existing FTAs, including Australia, China, India and Japan, is due to come into force in 2015.

Those are areas where Malaysian corporations have already taken a lead, with their industries targeted for growth under the government’s own economic transformation plan. Some of its biggest companies have become regional champions already leveraging ASEAN’s single market ambitions, the government’s own reform agenda and their own expertise.

Travelling around the region, it is impossible to avoid Malaysian brand names such as Axiata, which provides telecommunications services to emerging countries like Cambodia and more established markets like Indonesia. Banks have also made headway, with CIMB Group opening bank branches across ASEAN and deepening its investment banking expertise with the purchase of Royal Bank of Scotland’s regional equities business.

Better Links

Like ASEAN, Malaysia is also keen to improve its infrastructure, already among the best in the region. It is committed to the construction of a high-speed rail link between Singapore and Kuala Lumpur (KL) that would mean a journey time between the two cities of just three hours and provide a vital link in the Singapore-Kunming rail network that has been on the drawing board for decades. It is upgrading tracks north of KL and building new highways, and recently opened a multi-billion dollar second terminal at the KL International Airport, for the exclusive use of low-cost carriers. At this stage, that means mostly AirAsia.

Still, for all these positive developments, ASEAN and Malaysia still struggle with reducing barriers to trade. Even as AEC and other trading commitments demand tariff rates of zero, countries have negotiated exclusions and exceptions. Non-tariff barriers also remain a big problem in a region where there are powerful business and industry lobbies.

“If this is not robustly addressed, it can lead to stagnation of intra-ASEAN trade and investment and eventually derail the ASEAN market integration process,” Le Luong Minh, the secretary-general of ASEAN, admitted to the ASEAN Business Club in November 2013.

Non-tariff barriers include Customs requirements, industry certification and regulatory standards. Echoing the secretary-general, Myrna S Austria, professor of economics at De La Salle University in the Philippines, believes non-tariff barriers have replaced tariffs as “protective measures” and could undermine the entire integration initiative. Malaysia, despite its success in most areas of AEC implementation, has also sought to protect cherished industries. Policies that inhibit competition continue to remain on the books. The domestic car industry, for example, the brainchild of Mahathir Mohamad who was prime minister until 2003 and remains extremely influential in politics, continues to receive preferential treatment. Foreign-made vehicles are subjected to excise duties as high as 105% depending on engine capacity, while a controversial import permit system has yet to be dismantled.

In April 2015, in a bid to diversify government revenue away from its reliance on income tax, it will introduce a goods and services tax, which will replace the existing sales tax and is set at 6%. A number of basic needs are excluded. Hugely unpopular, in 2009, the government was forced to shelve its first attempt to introduce the tax. This time PM Najib has vowed to move ahead with the plan despite opposition – tens of thousands took to the streets of KL on May 1 to voice their opposition – insisting the government must be more fiscally prudent and reduce its deficit.

Analysts say Malaysia will need to marshal all its political and diplomatic determination as ASEAN chair to tackle the shortfalls in the current economic integration agenda and devise a new policy post-2015.

Labout Market

The International Labour Organisation (ILO) said in May 2014 there was a “significant lack of readiness to face the competition created by an integrated, regional labour market”. The ILO noted a huge disparity in skills and concerns among some of the region’s labour-exporting nations that closer integration will lead to a brain drain. There are some 6.5m migrants within ASEAN, over four times more than in 1990. A high-level taskforce is developing a framework for what ministers call “enhanced” integration from 2016 to 2025. “The 2015 target is not an end-date to conclude the initiatives of realising the AEC,” the group’s economic ministers said at the end of their Singapore Retreat in 2014. “Rather, the pursuit of expanding and deepening market integration will need to continue beyond 2015, in order to sustain regional economic development and resilience as well as enhance ASEAN’s role in East Asia and the global economy.”

Malaysia has made clear that it sees a bigger role for the ASEAN Secretariat, which exists on a skeletal staff and an annual budget of $17m despite the increasing demands on its expertise. It aims to review the way the institution is funded, enabling states to give more than the current $1.7m and proposing contributions be made on a three- to five-year basis rather than annually to provide some predictability. “Malaysia will have to find ways to overcome specific objections to the 2015 goals in certain areas deemed to violate national sovereignty,” Nicholas Zefferys, former president of the American Malaysian Chamber of Commerce, wrote in an email from his home in Seattle. “This democratic approach to decision-making and the list of ASEAN goals and aims augur towards a strong secretariat. Perhaps it needs to be strengthened to support the challenges that Malaysia and (its) successors will face.”