The ASEAN Economic Community: An Overview

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Niresh Manoheran's picture

The ASEAN Economic Community, set to be implemented at the end of the year, is meant to transform the fortunes of the region and reel in a new era of economic prosperity. With regards to this, the purpose of this essay is threefold. First, it is to analyze the mechanism for growth and economic integration. That is, how the relationship between the member nations needs to evolve in order to achieve the economic prosperity that the region craves, with the focus being on how the gradual removal of trade tariffs between the ASEAN countries and the harmonisation of non-tariff barriers will help the region utilize economies of scale and encourage an acceleration of economic growth in the region, thus getting ASEAN to the point of recognition as a single marketplace and production base, as per the AEC agenda. The second is to consider the broader implications of creating such an economic identity, and the social and political institutions needed for it truly prosper in the long run, as the leaders of ASEAN manage social integration in the region. The third focus is on the political nature of the region and how ultimately without strong political willpower to put in place these necessary social institutions, ultimately the idea of an economically integrated ASEAN is not going to be a successful one. As is often cited by sceptics of the ASEAN Economic Community, the region is going to need to evolve politically at some point, however such a need may yet be several decades in the future, and there is enough organic room for growth in the short to medium term span of about a decade in order for the region to begin to grow organically while the social and political institutions necessary for continued growth are put in place.

Before delving into the AEC as a whole, it is perhaps useful to consider the ASEAN countries in the following framework. That is, we can consider the ASEAN countries as comprising four blocks, or levels, of economic prosperity. First, there is Singapore, which is by far the most economically prosperous nation in the region by most measures of economic prosperity commonly used. Then, there are the two higher income economies of Malaysia and Thailand. I will also include Brunei in this, despite having a per capita income and economic size closer to that of Singapore, because of the high levels of inequality and the lack of capital for mobilization, but is even then arguably not imperative to understanding the ASEAN and AEC setting. In the third tier, we have Indonesia, Vietnam and the Philippines; three countries that would perhaps on paper be expected to match the standards of living enjoyed by Malaysia, Thailand and Indonesia but for several reasons do not. Then, there are the three poorest countries in the region- Myanmar, Laos and Cambodia, all three of whom have been marred by political strife and civil war over the decades (WEF, 2012). They have low levels of human development, and few natural resources to work with. In these three countries restrictive government policies and a lack of opportunity have taken their toll and without significant investment from overseas, there appears little hope for them to pull themselves out of the poverty trap they find themselves in.

This then leads us to the economic development of the region. The core driver of growth in the region is going to come from achieving economies of scale, as trade barriers between the ASEAN countries comes down (WEF 2012, 2015a). This is arguably going to be a case of matching physical capital in the first and second tier countries described in the previous paragraph, and matching them with cheap unskilled labour in primarily fourth tier countries. It will also be a case of giving entrepreneurs from the more developed countries access to consumers in the lower income countries, giving them access to better goods and services. A further economic boost in this sense will likely come gradually, as manufacturing across the region expands and develops and production efficiency increases through the specialization of labour as service and production hubs develop across the region, and attract skilled labour and physical capital from across the region (WEF, 2012). Critics will argue that all of this needs to be seen in the context of the AEC’s slow implementation, with many critics lamenting the slow moving nature of the AEC’s implementation, including the move by ASEAN to delay the introduction of the AEC from the 1st of January 2015 to the 31st of December (Xianbai, 2014; Fernquest, 2015). They will likewise cite protectionism by the individual countries to In spite of that, an example being Indonesia’s unwillingness to ratify the ASEAN Multilateral Agreement for Full Liberalization of Air Freight Services (MAFLAFS), to protect its local industry from competition from neighbouring Malaysia, Singapore and Thailand. In spite of problems like this however, AEC optimists can take comfort in the fact that apart from a few isolated occurrences like the above, the general pattern has been such that over the past 4 years, depending on estimates, somewhere between 80% to 95% of non-tariff barriers on the trade of goods and services between the ASEAN members have been removed (Fernquest 2015, Carnegie Endowment 2015).

The problems then, are mostly associated with the longer-term prospects of the region and producing a stable platform for future growth. This leads us to considering the institutions that would be needed to handle the following two sides of the same coin. The first, being how to limit the downside risk to allowing goods, services, capital and skilled labour to flow freely within ASEAN. The second, is how do we maximise the benefits of opening up trade routes between the states, and what kind of structural reforms would be necessary to achieve them. This points us in the direction of solving the social issues that are already largely present in the region, in particular corruption, where the region as a whole ranks below far below most developed countries by most measures commonly used to gauge corruption (Transparency International, 2014). Another such problem, is dealing with working rights, and how the poorest members of these societies will fare in a bigger economic environment. As the Little India riots in Singapore last year pointed out, even a country with civil institutions as strong as Singapore’s is still at risk of social unrest and its associated problems where social inequality goes unchecked. If the influx of unskilled labour from poorer countries into the relatively developed countries like Malaysia and Thailand is not managed well, we can expect the resulting social problems to be of an order of magnitude worse. Thus, without addressing these problems and without active efforts from ASEAN member governments to improve their social institutions to allow for the expansion and strengthening of business and economic activity within their borders, it is hard not to see growth reaching a relatively swift plateau after an initial burst.

The third big problem, is addressing how political influence will change within the region. This is perhaps the elephant in the room that none of leaders of ASEAN seem willing to address, at least not publicly. One of the very first building blocks of the ASEAN Economic Community as described in its 2007 (ASEAN, 2007) blueprint was the spirit of political non-interference between the member countries. This is hardly surprising given the lack of trust that has existed between the member states over the centuries dating back to the Malaccan and Srivijayan empires in the 15th and 16th centuries (WEF, 2015a). It is however highly counterproductive given the nature of the project at hand. Unlike in the Eurozone, where Germany has always been seen, however reluctantly on its own part, as the leader of the union, there are no obvious choices for such a leadership role in ASEAN, given Singapore’s relative size and the recent political histories of Malaysia, Indonesia and Thailand. Another issue that should be prioritised is an agenda to reform and strengthen the ASEAN Secretariat, as raised by the Thai Deputy Prime Minister at a World Economic Forum panel on the AEC in February (WEF, 2015a), and putting in place an independent body that will both lead communication and drive negotiations from a regional perspective, both with external trading partners and in resolving disputes along the way.

Thus, we could perhaps conclude that the prospects of the ASEAN Economic Community hinge to a large extent on the willingness of its leaders to embrace change and reform that many of them have been most opposed to over the course of the past 60 years. As both tariff and non-tariff barriers to trade come down, there should be plenty of opportunities for growth in the short term, and this process will accelerate as entrepreneurs and business owners in the region become alert to the opportunities open to them. In the long term however, the necessity for significant political willpower to enact tough social and institutional reforms that are already hampering growth domestically will continue to hamper the region in the long run, making ASEAN a more connected market but with the same problems.

 

 

 

 

References: 

 

References

ASEAN (2007) The ASEAN Economic Community Blueprint. Retrieved from http://www.asean.org/archive/5187-10.pdf on 31/3/2015

 

The Carnegie Endowment (2015) [Carnegie Endowment] The ASEAN Economic Community in 2015. [Video File]
Retrieved from https://www.youtube.com/watch?v=Hy7U5W3YiBk&index=2&list=PL2NsOquAcWE55xI4cBvwWby0daH4rE-xP on 31/3/2015.

 

Fernquest, Jon (2015)ASEAN Economic Community: Ready or not, here it comes. The Bangkok Post Online. Retrieved from http://www.bangkokpost.com/learning/work/454697/asean-economic-community-2015-ready-or-not-here-it-comes on 31/3/2015.

Transparency International. (2014) Transparency International Corruption Index, Country by Country Infographic [Infographic].Retrieved from http://www.transparency.org/cpi2014/infographic/regional/asia-pacific on 31/3/2015.

World Economic Forum (WEF) (2012) [World Economic Forum] East Asia 2012 - ASEAN Connectivity: Roadmap to 2015. [Video File] Retrieved from https://www.youtube.com/watch?v=dBksWxH3ocU&list=PL2NsOquAcWE55xI4cBvwWby0daH4rE-xP on 31/3/2015.

 

World Economic Forum (WEF) (2015a) [World Economic Forum] Davos 2015 - The ASEAN Agenda [Video File] Retrieved from http://www.weforum.org/events/world-economic-forum-annual-meeting-2015 on 31/3/2015.

 

World Economic Forum (WEF) (2015b). Creating the ASEAN Economic Community [Video File]. Retrieved from http://www.weforum.org/events/world-economic-forum-annual-meeting-2015 on 31/3/2015.

Xianbai Ji (2014) Why the ASEAN Economic Community will struggle. The Diplomat. Retrieved from http://thediplomat.com/2014/09/why-the-asean-economic-community-will-struggle/ on 31/3/2015

Other Resources

Hubbard, G. and Kane, T. (2014) Balance: The Economics of Great Powers From Ancient Rome To Modern America. Publisher: Simon and Schuster.