Coming together: Looking ahead to the introduction of the ASEAN Economic Community at the end of 2015

Indonesia continues to be the dominant nation in South-east Asia both politically and economically. Its participation within ASEAN will likely determine the shape of regional integration, with the introduction of the ASEAN Economic Community (AEC) at the end of 2015 looming as the next major milestone.

The AEC is expected to create new opportunities for investors in a region that boasts not only some of the world’s fastest-growing economies, but also a rapidly expanding middle class. “ASEAN and South-east Asia are one of the few really bright spots in the world economy,” said Teoh Kok Lin, founder of Singular Asset Management in Kuala Lumpur. “We still have a young population so the demographics are positive. We also have a huge emerging middle class. It’s a sweet spot.”

A Growing Bloc

In the past decade the economies of emerging Asia have expanded by more than 7.5% a year, according to the IMF. ASEAN’s combined GDP is already valued at $2.3trn and is expected to reach $10trn by 2030. The group, now home to an estimated 609m people, was formed in 1967. The original members – Malaysia, Indonesia, Singapore, Thailand and the Philippines – made economic growth a priority from the very start. Historically, members have tended to compete in the same industries, focusing on the potential outside ASEAN rather than within the region. Even today, intra-ASEAN trade is just 25% of the region’s total. The group’s 10 members compete in areas such as food processing, telecoms, tourism and business services, while those with better standards of English have tended to have an advantage in the global economy.

The original five are now at the core of what has grown into a highly diverse organisation. As well as differing political systems, there are also vast disparities in economic management, culture and wealth. Singapore is the richest but also the smallest. Its per capita income might be 45 times that of Myanmar, but it has less than 1% of ASEAN’s population. Myanmar, by contrast, is home to more than 60m people.

Background

The AEC was launched in 2003 as the region emerged from the Asian financial crisis. Five years earlier, the collapse of the Thai baht ricocheted across the region, triggering deep recessions and bringing an end to the rule of Indonesia’s President Suharto. In the aftermath, leaders sought a way to rebuild their economies on a more secure foundation.

“Asians did not draw the wrong lesson from the Asian crisis; they did not hunker down, pull up draw bridges or withdraw from the world,” Christine Lagarde, the IMF’s managing director, said in a speech in Kuala Lumpur in November 2012. “Asia’s economic foundations became safer, sounder and more resilient, but still open to the world and open for business.”

The AEC is designed to transform ASEAN’s 10 members into a single production base, allowing for the free movement of goods, services, investment, skilled labour and capital. Initially set to take effect in 2020, the AEC is now expected to come into force on December 31, 2015. ASEAN has also championed integration as a way to bridge some of the developmental differences within and among members, deepen the region’s economic ties with the rest of the world and compete more effectively with China.

Targets

The group has set itself key targets and deadlines in a binding “blueprint” that tracks each of the AEC’s four pillars and was agreed in 2007. An “AEC scorecard” keeps track of each country’s compliance.

Lim Hong Hin, the deputy secretary-general with responsibility for the AEC, notes that as of August 2012, 72% of measures for 2008-11 had been implemented. Still, other than peer pressure, there are no penalties for those countries that miss their targets and no way to ensure measures take effect.

With the AEC built on the existing ASEAN Free Trade Agreement, it is perhaps not surprising that most progress has been made in trade liberalisation. But efforts to integrate Customs procedures to create a “single window”, liberalise services, and harmonise crucial regulations and standards have been slower.

Local corporations, fearful of competition in their home markets and often politically well connected, have made it difficult for governments to effect the policy changes that the AEC demands. Indeed, a Global Trade Alert report notes that in 2011 Indonesia adopted more potentially restrictive trade measures than any other country in South-east Asia, ranking it among the top 10 protectionist nations.

Tracking Implementation

Jayant Menon, the Asian Development Bank’s lead economist for trade and regional cooperation, has been tracking the implementation of the AEC. He doubts the core countries will meet their 2015 target for implementation – though they will declare the AEC in existence anyway – and admits that the poorer nations of Cambodia, Laos, Myanmar and Vietnam are even further behind, perhaps by as much as a decade. But he stresses that the 2015 target should be seen more as a “milestone” than a hard target. “One should not expect that in 2015 to see ASEAN suddenly transformed; its nature and processes abruptly changed and its members interests substantially altered,” he said. “2015 should be viewed more as a milestone year – a measure of a work in progress. The journey remains relevant even if the destination takes longer to arrive at.” Menon estimates the region’s core members will achieve AEC implementation by 2020, their original target.

Global Uncertainty

Officials are also mindful of the region’s vulnerability to the uncertainty in the rest of the world. “The intensification of global risks puts into question the credibility of globalisation and casts some doubts on the region’s ability to manage its own integration,” Lim told delegates at a forum on the AEC in September 2012. “Of particular concern are the potential pullbacks in trade and capital flows into the region as global conditions deteriorate, and the possibility that some ASEAN countries may revert to protectionist measures and inward-looking policies to protect their own domestic economies.”

The poorer nations, Cambodia, Laos, Vietnam and Myanmar, have, officially, until 2018 to reach their targets, but even richer countries have been able to negotiate exclusions for what they deem to be “sensitive” industries. Indonesia and the Philippines are seen as among the most restrictive, concerned about opening their vast domestic markets even to regional rivals.

Rising Trade

Still, while data suggests policy implementation has been slower in some areas than it should be, trade between ASEAN and the rest of Asia, as well as within ASEAN itself, has risen sharply in the past decade. The most recent data shows trade within the 10-member bloc rose to $520bn in 2010, compared with just $121m in 1998. There are signs too that member states appreciate the benefits of convergence and cooperation.

Increasingly, electronics factories in ASEAN are making components that are then shipped to production centres in China for assembly and export to the wider world. Japanese carmakers have taken advantage of the ASEAN Industrial Cooperation Scheme to set up an integrated region-wide production system. Moreover, the importance of trade to the region is reflected in the proliferation of free trade agreements either on a bilateral basis or between ASEAN and its major trading partners, such as China, Japan and Korea.

Much then will depend on what happens in the next two years, with many looking to Malaysia, which will take the ASEAN chair in 2015, to convince its neighbours to embrace the common market and ensure that ASEAN’s disparate members achieve the economic ambitions to which they have long aspired.