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.
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:
1.To accelerate economic
growth, social progress, and cultural development in the region.
2.To promote regional peace
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
6.To promote Southeast Asian
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%.
ASEAN economy is one of the largest economic zone in the world and is projected
to rank as the fourth-largest economy by 2050.
At US$ 2.4 trillion 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
population of all members is approximately 625 million,
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.
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
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.
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.
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
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.
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
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.
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
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%.
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.
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.