ASEAN Economic Community: Wishful thinking?

Wahyudi Wibowo, Busan, South Korea | Tue, 11/22/2011

Along with the sparkling cheers of the 26th SEA Games in Palembang, the 19th ASEAN Summit began in Bali on Nov. 17. Among other agenda items, the summit strengthened the commitment of the country leaders to pave the way toward an ASEAN Economic Community (AEC), scheduled to commence by 2015 for the founding members: Indonesia, Malaysia, the Philippines, Singapore and Thailand, and by 2020 for the remaining member states: Brunei Darussalam, Cambodia, Myanmar, Laos and Vietnam.

The AEC envisions the ASEAN region as a single market and production base. So far, however, what can we say about the current figures? Is there a prevailing sense of optimism or pessimism?

First of all, it is apparent that ASEAN has changed a lot over the last two decades or so. In conjunction with its traditional role to maintain political stability in the region, there has been a tendency to enhance economic integration among the member countries, which is often termed as regionalism.

The Southeast Asian model of development has been characterized by an increasingly export-led and foreign direct investment (FDI)-led development strategy. ASEAN members’ engagement with international trade and investment has enabled them to exploit their comparative advantages, achieve economies of scale and open access to foreign capital, technology and skills.

Economic integration, such as a single market with no discrimination for commodities and production factors, is expected to bring advantages to the region. This is similar to the EU-style of regionalism but without macroeconomic or monetary integration.

With that in mind, several independent studies were conducted, which elucidated the potential of an AEC to increase ASEAN’s economic activities and competitiveness within the global landscape.

For example, the ASEAN Competitiveness Study by McKinsey in 2003 estimated that an integrated ASEAN would increase regional gross domestic product (GDP) by at least 10 percent, or nominally US$50 billion, while reducing its operational costs by up to 20 percent.

Seen from that best-case scenario, an AEC would seem to be a hugely positive initiative for the development of ASEAN economies; thus, we can expect a common commitment by all member states to produce the AEC. However, there are some difficulties in realizing it.

Let us first weigh the modalities of ASEAN to convey its vision. In general, ASEAN has been quite successful in promoting peaceful cooperation and shared development among its members. Following their developmental shift toward manufacturing, ushered in by ASEAN’s five founding nations, ASEAN displayed an interest in achieving closer economic collaboration by signing a Preferential Trading Agreement (PTA) in the late 1970s.

Important subsequent developments occurred in the 1990s when ASEAN leaders decided to enjoy greater liberalization, by establishing the ASEAN Free Trade Area (AFTA) in 1992. They then concluded the supplementary ASEAN Framework Agreement on Services (AFAS) in 1995 and established the ASEAN Investment Area (AIA) in 1998.

The origins of an AEC appeared at the ASEAN Summit in 2003. Advancing the trade liberalization under the AFTA, a fast-track scheme was developed to foster integration in 11 priority sectors, which together accounted for more than half of the total trade within ASEAN.

Nonetheless, the slow pace of integration and the lack of effective implementation have been criticized. The tariff schedules are a significant exception, but the non-tariff barriers have yet to be dismantled and these include cumbersome customs procedures, diverse product standards and requirements, and a lack of connectivity in cross-border transportation and telecommunications.

As such, ASEAN is far from being a single production base in which manufacturing operations can be linked seamlessly across the region.

In light of these problems, we can note here several key factors that are frequently cited. First, not all of ASEAN’s 10 member countries are willing and able to move at the same pace. Unlike other economic regions, ASEAN is very diverse. It consists of high-, middle- and low-income economies.

The structural differences among ASEAN members appear to create a reluctance to give up their national policies; for instance, in relation to the huge discrepancies between the member states in their average external tariff levels. Another example is the widely divergent stages in each member’s services sector. Hence, there exist development gaps within ASEAN.

Second, for a long period of time, ASEAN countries have been inextricably linked to external markets. No wonder the volume of intra-ASEAN trade has remained so low, at 20-25 percent, for decades.

Moreover, intra-ASEAN trade has grown at a much slower pace than ASEAN’s total trade. These facts indicate that, in the eyes of ASEAN, the rest of the world is still far more important. That is, of course, due to the economies of scale.

This reflects some important factors. First, the economies are more competitive than complementary in structure. They are producing a narrow range of similar primary products and labor-intensive manufactured goods for export.

Second, the intra-industry specialization and regional division of labor is not yet well developed, although there have been some recent improvements. It should be noted that FDI entering the region is closely associated with intra-industry trade, especially in the automotive and electronics industries.

Third, the divergence effects of ASEAN’s external FTA. ASEAN has actively developed a number of external FTAs with APEC (Asia-Pacific Economic Cooperation), CER (Closer Economic Relations; a free trade agreement between Australia and New Zealand), Japan, South Korea, India and recently China. In addition, many members are increasingly active in arranging bilateral FTAs with external countries.

Let us now conclude with some reflections. The tendency of ASEAN to be more externally oriented is actually a necessity to taking full advantage of its trading performance in regard to the existing demands and economies of scale.

Looking at the current structure and divergent development stages among the different ASEAN economies, it is likely that each country will still attempt to exploit its comparative advantages to increase specialization. In the future, this will lead to a more efficient and competitive region as a whole.

However, in its current phase, to imagine ASEAN as a fully integrated economy is a kind of wishful thinking. This conclusion may sound pessimistic; in part, it may result from the static effect of the analysis.

But, at least for the foreseeable future, we can expect the second-best effects to occur. That would include a limited integration of highly interrelated industries in the region. Then gradually, that may generate a spillover effect to other industries.

Perhaps in the future, we would consider it part of the ASEAN way.

The writer, a lecturer at Pelita Harapan University in Surabaya, is pursuing his doctorate at the department of International Trade and Commerce at Kyungsung University, South Korea.