AEC Dream’s Failure ‘Still A Success’

 
 

ASEAN’s goal of achieving economic integration by the end of 2015 has been largely written off by critics. But despite the delay, analysts still see sizeable gains from the ASEAN Economic Community (AEC), particularly for the region’s bigger economies.

In a March 4 presentation, BMI Research’s head of Asia research, Cedric Chehab said ASEAN’s collective gross domestic product (GDP) would grow from $2.4 trillion in 2013 to more than $6.2 trillion by 2023, expanding at a compound annual growth rate of more than 10 percent. ASEAN’s share of global GDP is expected to increase from 3.2 percent to 4.7 percent by 2023, with its share of world trade rising from 5 to 6 percent.

“Asia’s GDP will double while ASEAN’s will more than double, and it’s faster growth than the Middle East and as large and larger than Africa…it’s quite difficult to find other regions with as strong growth prospects as ASEAN,” he said.

Enjoying this article? Click here to subscribe for full access. Just $5 a month.

The economic growth will occur despite ASEAN’s expected failure to meet its self-imposed deadline, Chehab said.

“We don’t believe the AEC will actually meet the end-2015 deadline and in fact we see the AEC as more of an evolution rather than a revolution. The move toward the AEC will be a gradual process given the numerous trade and non-tariff barriers that currently exist,” he said.

The AEC is seen as the “realization of the end goal of regional economic integration” by ASEAN’s 10 member economies, comprising Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam, encompassing more than 620 million people.

The AEC aims to transform ASEAN into a region with “free movement of goods, services, investment, skilled labor and freer flow of capital,” based on four key pillars of a single market and production base, a highly competitive economic region, equitable economic development and full integration into the global economy.

Yet after first being proposed in 2007 as part of the ASEAN Vision 2020, the deadline for the AEC was moved from January 1, 2015 to December 31, 2015, with observers now reportedly eyeing a “post-2015 agenda,” despite official reassurances.

In November 2014, ASEAN reported that “good progress” had been made across approximately 88 percent of three pillars of the AEC. However, business has shown skepticism, with respondents to a survey of U.S. businesses in the region expressing doubts whether the AEC’s goals would be achieved even by 2020.

According to the “ASEAN Business Outlook Survey 2015,” just 4 percent of respondents considered it likely that the organization would achieve the AEC goals by the end-2015 deadline, down from 23 percent in the corresponding survey the previous year.

Nevertheless, 66 percent of respondents said ASEAN markets would become more important to their companies’ global revenues over the next two years, with 89 percent forecasting increased trade and investment over the coming five years.

According to the Asian Development Bank’s Jayant Menon, ASEAN has made the greatest progress in tariff reduction, with more than 70 percent of intra-ASEAN trade now incurring zero tariffs under the ASEAN Free Trade Area. According to ASEAN, average tariff rates on intra-ASEAN imports have declined from nearly 3 percent in 2003 to 0.5 percent in 2014.

However, gaps remain between the region’s larger and smaller economies in areas such as trade facilitation and investment liberalization, while services trade has proved harder to liberalize. Menon also cited problems in protecting intellectual property rights as well as reducing development disparities between the region’s rich and poor, although progress with the fourth pillar has seen the rise of “Factory ASEAN.”

“Accommodating AEC accords will not be easy when they require changes to domestic laws or even the national constitution. The flexibility that characterizes ASEAN cooperation, the celebrated ‘ASEAN way’, may hand member states a convenient pretext for non-compliance,” he warned in East Asia Forum.

“If the AEC is to be more than a display of political solidarity, ASEAN must find a way to give the commitments more teeth. The 2015 deadline should be viewed not as the final destination but as a milestone on the slow and long journey towards the AEC.”

Highlighting the region’s economic divide, both Brunei and Singapore had GDP per capita exceeding $35,000 in 2013, while Indonesia, Malaysia, the Philippines and Thailand ranged from $2,700 to $10,400.

However, BMI’s Chehab said there were benefits to the slow implementation of the AEC, which he said could be delayed to 2018 or even 2020 due to its legal, compliance and institutional requirements.

“One positive dynamic from this slow and incremental process of integration is that it will limit the risks of larger versus strong stemming from rapid liberalization,” he said.

“Sometimes there are shocks associated with the rapid liberalization of a particular economy, including the forced restructuring of uncompetitive industries which are subject to foreign competition, but also sometimes you have uncontrolled capital inflows which can be the result of rapid economic liberalization. A piecemeal approach will help reduce the risk of such unintended consequences.”

Industry Winners And Losers

While ASEAN has nominated 11 “priority integration sectors” comprising agribusiness, air travel, automotive, e-ASEAN, electronics, fisheries, healthcare, rubber, textiles, tourism and wood, there are expected to be some winners and losers in the process.

In the auto sector, Chehab said Thailand, Indonesia and Malaysia would further strengthen their position as manufacturing hubs, resulting in other countries such as the Philippines missing out on jobs and investment. Indonesia and the Philippines are expected to drive vehicle demand growth, given their large populations and low car ownership. Already, Japan’s Toyota Motor has flagged a new $1 billion investment in Indonesia, with Indonesian President Joko Widodo seeking further Japanese investment during his recent visit to Tokyo.

However, while smaller economies such as Cambodia and Laos are also expected to attract investment due to their lower wages, Chehab said non-tariff barriers such as excise duties could weigh on further integration, preventing the predicted industry growth from being fully realized.

The pharmaceuticals and healthcare industry is seen as another winner from the AEC, with Chehab predicting that ASEAN pharmaceutical sales will more than double by 2023, rising from $21 billion in 2013 to $50 billion, despite disparities in intellectual property rights and resources preventing full integration.

Chehab said increased government investment in healthcare and aging populations would spur demand, along with rising incomes. Private healthcare providers are expected to expand their regional footprint, while medical tourism should benefit Singapore, Malaysia and Thailand.

However, he warned of a potential “brain drain” of medical professionals from the less developed economies to their richer rivals, compounding a shortfall of medical staff and infrastructure in countries such as the Philippines and Indonesia.

“This is an existing trend, as for example many Filipino healthcare workers are already moving to Japan, but the AEC may accelerate this process, putting more pressure on some of the poorer countries which are unable to retain their staff,” he said.

In agribusiness, Thailand, Malaysia and Vietnam are expected to benefit the most, although given the sector’s political sensitivities, protectionist countries such as Indonesia may see limited gains. According to Chehab, Thailand could gain market share in sugar exports from the Philippines and Vietnam, while Vietnam should emerge as a winner in rice exports at the expense of Thailand. Vietnam, Malaysia and Thailand should also benefit the most from growing demand for dairy products, he said.

Another key winner from the AEC should be the region’s consumer electronics, IT and telecommunications sector. This is despite slow progress on removing barriers to foreign investment, particularly in telecoms, where countries such as the Philippines, Vietnam and Indonesia have high levels of state involvement.

Vietnam, Cambodia and Laos should attract increased investment in consumer electronics due to their lower wages, with both Indonesia and Vietnam becoming sizeable growth markets. Meanwhile, Chebab said the e-ASEAN initiative and increased smartphone usage would boost e-commerce, with some 60 million new consumers gaining internet access over the next five years, particularly in Indonesia.

“As a whole, the ASEAN region will benefit tremendously from the growth opportunity, the increased specialization, the reduction in prices for consumer goods as well as the increased integration of these economies,” Chehab said.

However, despite the AEC’s potential, headwinds include protectionist pressures limiting reforms, along with a potential slowdown in major trading partners, given that intra-ASEAN trade accounts for only a quarter of the total. China’s position as the region’s largest trading partner has left ASEAN exposed to a slowing Chinese economy, while top foreign investor, the European Union is struggling to emerge from recession.

Concerns have also been raised about the ability of the ASEAN Secretariat to drive change given its limited resources compared to bodies such as the European Union.

Nevertheless, ASEAN’s growth potential should keep the region in the spotlight for some time to come, regardless of its expected stumbles toward full integration.

Newsletter
Sign up for our weekly newsletter
The Diplomat Brief