Author: Jayant Menon, Asian Development Bank
Launched as a political bloc and security pact in the aftermath of the Vietnam War, ASEAN has evolved to embrace an ambitious economic agenda. Its latest project is to establish the ASEAN Economic Community (AEC) by 31 December 2015. But is this likely? The blueprint for achieving the goal envisages the AEC standing on four pillars and meeting the deadline depends on progress on each of them.
There have been a number of noteworthy achievements on the first pillar of realising a single market and production base. The greatest success has been in tariff reduction. Following the implementation of the ASEAN Free Trade Area, common effective preferential tariff rates between the ASEAN-6 (Brunei, Indonesia, Malaysia, the Philippines, Singapore, and Thailand) fell to virtually zero. As a result, more than 70 per cent of intra-ASEAN trade incurs no tariff and less than 5 per cent is subject to tariffs above 10 per cent. With tariff rates largely irrelevant, leaders need to prioritise eliminating non-tariff barriers.
Some progress has been made in trade facilitation and investment liberalisation. The National Single Window — a one-stop shop to speed customs clearance — has gone live in the ASEAN-6. In addition, these economies now approximate international best practice in investment liberalisation. But the four newer ASEAN members — Cambodia, Laos, Myanmar, and Vietnam — lag in both areas.
Trade in services has seen less liberalisation partly because it has a much shorter history than trade in goods and is harder to grasp. Agreements have been finalised to mutually recognise qualifications for some services, but the number of such services needs to be expanded and agreements need to be implemented in ways that improve mobility for skilled labor.
To achieve the second pillar of a highly competitive economic region, competition policy needs to be improved and the protection of intellectual property rights strengthened. These are difficult areas to reform. Questions remain regarding how effective a regional approach can be compared with national action or a multilateral approach. Standards harmonisation and regulatory convergence may offer considerable benefits to ASEAN as it develops its regional market. But developments with the ASEAN+6 Regional Comprehensive Economic Partnership (RCEP) may supersede this.
To achieve the third pillar of equitable economic development, the huge income and development disparities among ASEAN members must be addressed. Such disparities are inconsistent with the idea of economic community, however conceived. The Initiative for ASEAN Integration is one of several arrangements that have been proposed to help close the development gap and accelerate the integration of newer members. While such initiatives may be helpful, progress must come from within the newer members themselves as they institute broad economic reform that promotes trade and investment — as they have been doing.
The fourth pillar of full integration into the global economy has seen the greatest strides, which has enabled a thriving ‘Factory ASEAN’. Progress to date underlines how liberalisation has been driven more by market forces and unilateral actions than by regional agreements. ASEAN’s long-standing commitment to openness is one of its defining features and needs to be burnished to sustain and advance regionalism in Southeast Asia.
Each of the four pillars presents a demanding set of challenges to be met before the AEC can be fully realised. One challenge that cuts across the four pillars is achieving greater engagement with the private sector and the broader community. The AEC may be led by governments, but it cannot succeed without fully engaging business and the public at large. Efforts to prepare the private sector have enjoyed negligible success and public awareness is equally abysmal. This needs to change quickly if the AEC is to make a difference.
Although ASEAN has come a long way toward realising its goal, the challenges that remain suggest that the AEC will not meet its approaching deadline. The AEC Scorecard, ASEAN’s self-assessment mechanism, suggests that the region achieved only 76.5 per cent of the AEC targets that were due by March 2013. The AEC Scorecards further reveal that the pace of reform seems to have slowed, partly because the process has reached the more difficult parts of the reform agenda. Even if the pace picked up now and ASEAN managed to hit its remaining targets, the real test for the community would lie beyond 2015.
Accommodating AEC accords will not be easy when they require changes to domestic laws or even the national constitution. The flexibility that characterises ASEAN cooperation, the celebrated ‘ASEAN way’, may hand member states a convenient pretext for non-compliance. How to enforce the accords remains an issue. 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.
Jayant Menon is Lead Economist at the Office of Regional Economic Integration, Asian Development Bank, and Adjunct Fellow at the Arndt-Corden Department of Economics, the Australian National University.
The views expressed in this paper draw upon the ADB-ISEAS publication, The ASEAN Economic Community: A Work in Progress, but are those of the author alone and do not necessarily reflect the views and policies of the Asian Development Bank, its Board of Governors or the governments they represent.
As the ASEAN Economic Community’s (AEC) December 2015 deadline approaches, most observers feel that the initiative’s deliverables — an integrated production space with free movement of goods, services, and skilled labor — will not be achieved. This may be true. But the AEC should be seen as a work in progress. To simply say it will miss its deadline is to ignore other crucial facts about the AEC’s role and circumstances.
While lessons have been derived from the European Union, the AEC was not developed on the basis of this model. Since ASEAN’s inception, the sovereignty of nation-states and non-interference in domestic matters were key principles guiding the organization. Economic cooperation was sought in areas where it was deemed necessary. This included allowing for economies of scale and multinationals doing business in Southeast Asia, and anchoring production networks that were already developing in the broader Asian region. Economic cooperation was seen as a gradual process, with long-term aspirations, rather than a mechanism in which strict rules apply irrespective of the nature of member economies and changing global conditions.
Although the AEC is a regional initiative, it is implemented by national economies. Domestic law and policy is required to do things like cut tariffs, remove non-tariff barriers and liberalize the services sector. This can be difficult because each initiative is not the sole preserve of any one body but involves multiple ministries and other agencies. That some domestic economic actors stand to gain or lose from integration means that the AEC generates proponents and opponents. And this slows down the pace of implementation further.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
But the AEC is not the sole cause of increasing competition in domestic economies. The AEC vision was developed with an awareness of current global economic trends. The 10 ASEAN countries realized that their own WTO ascension would not lead to quick outcomes in a forum of 150 other countries at different stages of economic development. There the concerns and objections of small economies, like the ones in Southeast Asia, are not likely to be heard.
In contrast, ASEAN and the AEC are small enough to consider the interests of all and may also accord short-term flexibility. While this is likely to slow down the establishment of the AEC, advanced member countries — such as Singapore, Malaysia and Thailand — are not restricted to only this framework. All of them have pursued bilateral free trade agreements with their key trading partners. So, for any single country, heightened competition is a part of the globalization process. And there are other frameworks — be they bilateral, regional or multilateral — that can further economic liberalization.
ASEAN economic cooperation is a top-down initiative and hence awareness among stakeholders is low and uneven. The association was instituted in 1967 to promote peace and stability. It took another decade for economic cooperation to make the agenda. But economic cooperation has become a form of diplomacy that is often carried out by foreign ministries in consultation with commerce or trade ministries.
Some have observed that economic regionalism in Southeast Asia is the subject of political elites, with almost no involvement from other stakeholders. This has been accompanied by a low level of awareness of relevant economic cooperation measures, particularly among the final users.
But with the looming 2015 deadline, the private sector is now being listened to. And advocacy for trade initiatives by the private sector is not unanimous. It is often driven by the relative strength of particular firms that bring foreign direct investment into the country.
Finally, the AEC should not be seen in isolation from, but rather in conjunction with, the ASEAN Political-Security Community and ASEAN Socio-Cultural Community. A political security community works towards regional peace and stability, while a socio-cultural community encompasses regional cooperation in areas like environmental protection, limiting the spread of contagious diseases, transnational crime and cooperation when responding to natural disasters. It is hoped that, when combined, these initiatives will help to cultivate a sense of regional identity.
The AEC is a work in progress. Some promises have been met, but significant challenges also remain. Awareness among policymakers and final users is growing. ASEAN is often criticized for weak institutions, which has also made AEC implementation difficult. But only time will only tell how much of this can be changed. With the AEC and ASEAN Charter, the region has already evolved as a rules-based association.
Now is the time for ASEAN countries to come together to strengthen the economic community. The global economy has been in a constant state of flux since the 2008 economic crisis. While the AEC may not deliver on a fully integrated single market and production base for ASEAN stakeholders in 2015, it will help ASEAN members to withstand the next global crisis with confidence.
Sanchita Basu Das is an ISEAS Fellow and Lead Researcher on economic affairs at the ASEAN Studies Center, ISEAS, Singapore. A version of this article was originally published at the East Asia Forum here.