Association of Southeast Asian Nations (ASEAN) – A Look Back and Ahead

Companies are looking for new opportunities to grow beyond their existing markets. Emerging markets in Latin America, e.g. Chile, Brazil, Colombia, Peru, Mexico, are attracting attention from many companies but there is another market that might be out of sight but also worth exploring. Under the shadow of China, Southeast Asia is starting to flex its wings and silently becoming more recognizable in the global economy.



by Pidchapon (Fai) Niruthisard, MBA '17 (7/24/17)

ASEAN – A Look Back and Ahead

Emerging markets have been gaining more and more recognition over the past few years. Companies are looking for new opportunities to grow beyond their existing markets. Emerging markets in Latin America, e.g. Chile, Brazil, Colombia, Peru, Mexico, attract attention from North America, Europe and even China. However, there is another market that might be out of sight but also worth exploring. Under the shadow of China, Southeast Asia is starting to flex its wings and silently becoming more recognizable in the global economy.

What is ASEAN?

The Association of Southeast Asian Nations (ASEAN) was established in 1967 with the signing of the ASEAN Declaration or more commonly known as the Bangkok Declaration, by 5 countries. It was motivated by a fear of external power from exploiting the power vacuum of decolonization at the time, an opportunity to foster corporation with common interest and a believe that integration serves interests of all and renders a stronger voice to address major global powers.[1] The organization’s membership has later expanded to ten Southeast Asian countries: Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar, and Vietnam.

As set out in the ASEAN Declaration, the aims and purposes of ASEAN are:[2]

1.To accelerate economic growth, social progress, and cultural development in the region.

2.To promote regional peace and stability.

3.To promote collaboration and mutual assistance on matters of common interest.

4.To provide assistance to each other in the form of training and research facilities.

5.To collaborate more effectively for the greater utilization of their agriculture and industries, the expansion of their trade, the improvement of their transportation and communications facilities and the raising of the living standards of their peoples;

6.To promote Southeast Asian studies.

7.To maintain close, beneficial co-operation with existing international organizations with similar aims and purposes

ASEAN’s average annual growth rate was 5.2% between 2007-2016. It has consistently outperformed global growth and the average growth of the Asia-Pacific Economic Cooperation (APEC), which was 2.8%.[3] ASEAN economy is one of the largest economic zone in the world and is projected to rank as the fourth-largest economy by 2050.[4] At US$ 2.4 trillion[5] in 2015, it was the sixth largest in the world and the third largest in Asia, following China and Japan.  

Total ASEAN trade is approximately US$2.3 trillion. Intra-ASEAN comprised the largest share at 24%, followed by China (15%), Japan (11%), European Union (10%) and USA (9%). Foreign direct investment reached US$121 billion with the majority focuses on services sector. Similarly, intra-ASEAN was the highest source of investment at 18%. The ASEAN members are strategically located, particularly as a shipping and freight hub

A combined population of all members is approximately 625 million,[6] larger than the European Union or North America. Economies in the region is and will be driven by ASEAN’s unique demographic together with productivity improvements, contributing to growing consumer demand. As more than half of the population are under 30, youthful population will be the power house of ASEAN in the near future. Consuming class households could double the size to 163 million by 2030.[7]

What is AEC?

Initiatives towards the economic integration started as early as late 1980s as geopolitical factors pushed for regional corporation. Production networks have been fragmented to make use of each location’s advantage and reduce costs. In 1992, free trade agreements were mandated to facilitate the flow. ASEAN Free Trade Area (AFTA) entails bringing down tariffs among ASEAN economies. Subsequently, ASEAN Industrial Corporation (AICO) scheme promotes further joint-manufacturing between ASEAN-based companies where products are subjected to end-tariff rate and other investment incentives offered by ASEAN authorities.

In 2003, ASEAN outlined its three “pillars”: the ASEAN Political-Security Community, the ASEAN Economic Community, and the ASEAN Socio-Cultural Community. It decided to establish ASEAN Economic Community (AEC) in 2020, but, later in 2007, agreed to accelerate the process to 2015. The goal is to deepen its integration by capturing the region’s potential to be able to compete with Asia’s larger economy.

The first AEC Blueprint (2007-2015) consists of 4 key elements. First, the single market will ensure the free flow of goods, services, investment, capital and skilled labor. Second, policies improvement and infrastructure development will create a competitive region. Third, narrowing development gap and strengthen SME competitiveness will lead to equitable economic development regions. Forth, integration into global economy will be enhanced through external economic relations and global supply networks. At this moment, AEC Blueprint 2025 (2015-2025) is implemented. The new plan encourages ASEAN to be more proactive and enunciates the vision of leading ASEAN to be highly integrated and cohesive; competitive, innovative and dynamic; with enhanced connectivity and sectoral cooperation; and a more resilient, inclusive, and people-oriented, people-centered community, integrated with the global economy.[8] There are other 4 major agreements in relation to the AEC: ASEAN Trade in Goods Agreement (ATIGA), ASEAN Framework Agreement on Services (AFAS), ASEAN Comprehensive Investment Agreement (ACIA), ASEAN Agreement on the Movement of Natural Persons (AAMNP). See Expected Outcomes and Benefits of Select AEC agreements as by ASEAN.org [9]

ASEAN learns from EU’s integration and its setbacks and tries to implement what suits the member countries. AEC’s economic integration is unlike that of the European Union (EU) in that it is less bureaucratic. European Union operates through independent institution accepted by all members. ASEAN does not have similar bodies. The consensus is reached by political leaders from all countries with ASEAN Secretariat as a monitoring and coordinating body. It has not aimed to integrate monetary term or single currency, rather it focuses on integrative trade. In regards to tariff, common rate applies across ASEAN but imports from other countries are subjected to each economy’s rate. EU’s tariff rates, on the other hands, are commonly applied to all imports.


Challenges

Before 2015, many had raised questions if this integration would be materialized. In 2015, the AEC reached its milestone but the path forward requires dealing with its complexities and contradictions. Economic integration could expand opportunities to ASEAN countries but it also poses challenges.

1. Diversity in the region

ASEAN is characterized by a wide diversity of people, political systems, languages, and cultures. Economies are at different development stages but all share immense growth potential. The majority of the countries are categorized as lower middle income. The existing gap may widen as the integration progress. Investors cannot rely on a one-size-fits-all strategy and should be aware of local preferences and cultural sensitivities even though it appears to become more integrated. One thing that ASEAN consistently pursue is to consolidate some aspects but not to lose the identity of each country.

2. Subpar Infrastructure

Infrastructure gap ranks among the investors’ top concerns. Poor infrastructure restrains growth and several governments realizes that. "Countries have realized that the availability of soft and hard infrastructure at the national level is a prerequisite if they are to benefit from regional economic integration,” shared the Institute of Southeast Asian Studies senior fellow Sanchita Basu Das.[10] They have started to increase infrastructure spending. The downside is their focus will be shifted from implementing AEC to improving its infrastructures. Many countries and ASEAN itself do not have the financial resources to fulfill the need. Private investors gradually show interests as regulatory is more favorable. Regional development institutions and international financial institutions such as Asian Infrastructure Investment Bank (AIIB) are other big forces.

3. Corruption

Corruption is pervasive and deep-rooted in the majority of the countries. It jeopardizes the country’s ability to attract foreign investment. As foreign investors are subjected to anti-corruption legislation, they are at disadvantage when competing with companies that don’t hold accountable for such act. Accelerate the integration might aggravate the issue. Regional measures need to be effectively implemented to curb corruptions and its adverse effects.

4. Conflict of Interests

Most member countries take protectionist stances. Each has different expectations and strategic interests from AEC and they are mindful if other countries benefit at their expenses. As the less developed countries normally receive less than the more developed, economic integration takes lower priority to the first. For example, Singapore received the highest FDI in 2015 at around 50% of total net inflow while Cambodia, Lao and Myanmar receive around 0.1%-2%.[11]  So far, the economic integration has been about bundling package to attract internationals rather than creating tighter ties among members. If ASEAN can find ways to increasingly pool their sovereignty, it would help consolidate the integration process in the same direction to all.  

Looking Ahead

2017 marks the fiftieth anniversary of ASEAN establishment. ASEAN has come a long way but the road ahead would truly prove its ability to unleash potentials for ASEAN countries. The immense opportunity lies in Southeast Asia. To transition this Tiger Cub Economy to full-grown tiger one requires equally collaborations among all members and common regulatory frameworks to push the community forward as a bloc and to defiantly take a stand in a global arena. The key question is how long it will take. The answer of which remains to be seen.



[1] http://www.mckinsey.com/industries/public-sector/our-insights/asean-the-way-forward#0

[2] See in ASEAN website: http://asean.org/asean/about-asean/overview/

[3] http://www.mckinsey.com/industries/public-sector/our-insights/understanding-asean-seven-things-you-need-to-know

[4] http://www.mckinsey.com/industries/public-sector/our-insights/understanding-asean-seven-things-you-need-to-know

[5] http://asean.org/storage/2012/05/ASEAN_in_2016.pdf

[6] https://en.wikipedia.org/wiki/Association_of_Southeast_Asian_Nations#Economy

[7] https://www.canback.com/files/2014_MK_MGI%20SE%20Asia_Executive%20summary.pdf

[8] http://asean.org/asean-economic-community/

[9] http://investasean.asean.org/index.php/page/view/asean-economic-community

[10] http://www.afr.com/news/special-reports/asia-business-outlook/business-divided-on-the-state-of-asean-infrastructure-improvements-20161006-grw6l9

[11] http://asean.org/?static_post=foreign-direct-investment-statistics

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