An ASEAN Economic Community by 2015?

Jayant Menon

The Association of Southeast Asian Nations is the most successful regional grouping in the developing would. Its latest project is to establish an ASEAN Economic Community by 31 December 2015, consisting of economic, political-security, and social cultural components. This column argues that giving commitments more teeth is the key challenge to be overcome in realising the ASEAN Economic Community if it is to be more than a political exercise in solidarity.

The Association of Southeast Asian Nations (ASEAN) is the most successful regional grouping in the developing would. Born as a politico-security pact in the aftermath of the Viet Nam War in 1967, it started with five countries: Indonesia, Malaysia, the Philippines, Singapore and Thailand. Brunei Darussalam joined in 1984, followed by Viet Nam in 1995, Lao PDR and Myanmar in 1997, and finally Cambodia in 1999, bringing the total to 10 countries. Apart from expanding its membership, ASEAN has evolved to embrace an ambitious economic agenda. Its latest project is to establish an ASEAN Community by 31 December, 2015, consisting of three components: Economic, Political-Security, and Social Cultural. If ASEAN were one economy, as the ASEAN Economic Community intends it to be, it would be seventh largest in the world with a combined GDP of $2.4 trillion in 2013. With over 600 million people, ASEAN’s potential market is larger than the EU, and has the world’s third largest workforce (Hill and Menon 2012).

The following three questions are fundamental to the ASEAN Economic Community, and are addressed in turn, below: (i) What are the achievements to date in terms of realising an ASEAN Economic Community?; (ii) What are the remaining challenges; and (iii) Is the deadline likely to be met, and will it matter?

Achievements to date

There have been a number of noteworthy achievements by ASEAN member states on the road to ASEAN Economic Community 2015:

Tariffs. This is a success story of political commitment for ASEAN member states. Following the implementation of the ASEAN Free Trade Area, common effective preferential tariff rates are virtually zero for ASEAN-6. More than 70% of intra-ASEAN trade is conducted at zero most-favoured nation tariff rates, and less than 5% are subject to tariffs above 10% (WTO 2011).

Trade facilitation. The five original member states of ASEAN have live implementation of national single windows already with planned full rollout to all significant ports and airports by 2015.

Investment liberalisation and facilitation. The original ASEAN member states are near achieving international best practices while the newer members have to catch-up.

Services liberalisation. Mutual recognition agreements or their equivalent have been agreed for three types of goods and seven professions, and a “‘framework agreement”’ has been concluded.

Remaining challenges

But challenges remain within each of the ASEAN Economic Community’s four pillars.

The biggest challenges relate to Pillar 1 – creating a single market and production base. This is despite the fact that the single market concept is nowhere near as ambitious as that in Europe (Lloyd 2005). To hasten progress in this pillar, ASEAN needs to prioritise the following:

Eliminating non-tariff barriers, which are increasingly replacing tariffs as protective measures (Soesastro 2006);

Strengthening trade facilitation by ensuring live implementation of national single windows in the newer member countries to complete the ASEAN Single Window; and

Further liberalising investment and services trade by improving the business climate and reducing the cost of doing business, including prescribing standard rules governing licensing and other regulatory regimes; and

Expanding the number of mutual recognition agreements and ensuring that they are implemented in a way that leads to increased skilled labour mobility.

Pillar 2 aims at creating a highly competitive economic region. In order to do this, competition policy needs to be improved, and intellectual property rights protection strengthened. These are difficult areas of reform, and questions remain as to how effective a role a regional approach can play compared to national action or a multilateral approach. Nevertheless, there are potentially considerable benefits regionally from the harmonisation of standards and regulatory convergence, particularly in developing a regional market.

Pillar 3 involves creating a region of equitable economic development. ASEAN is significantly more diverse than Europe, in economic, political, cultural, and linguistic terms. The huge disparities in income and levels of development that currently characterise ASEAN are inconsistent with the concept of an economic community, however defined. Sub-regional arrangements such as the Initiative for ASEAN Integration have been proposed to accelerate integration of the newer members- Cambodia, Lao PDR, Myanmar and Vietnam- into ASEAN.

While sub-regional zones can potentially help reduce development gaps and support the growth of global value chains, the reality is that neither the Initiative for ASEAN Integration nor other sub-regional initiatives will have the resources, or the ability, to fully address the development divide. Unlike in Europe, the wealthier countries of ASEAN are very small- Singapore and Brunei- and cannot finance the kind of transfers required in order to make a dent in filling the huge developmental gaps. While these initiatives and support from bilateral and multilateral donor agencies can play a part, the solution must come from within the countries themselves, and through broader economic reforms that promote trade and investment, and thereby enable them to catch-up. Indeed, this is what they have been doing, and what has been happening (Menon 2013).

Finally, Pillar 4 is about creating a region that is fully integrated into the global economy. The biggest strides have been made in this pillar, which has enabled ‘Factory ASEAN’ and global value chains to thrive. This underlies the fact that liberalisation thus far has been driven more by market forces than by regional agreements; and that the shift in focus from unilateral liberalisation to preferential liberalisation through trade agreements has not led to further external opening or domestic reform, since these trade agreements tend to be “weak” and “trade-light.” (Sally 2013; WTO 2011). ASEAN’s long-standing commitment to openness is a defining trait, and should continue if regionalism is to be sustained, let alone prosper.

Each of the four pillars presents a demanding set of challenges to be met if the ASEAN Economic Community is ever to be realised. Cutting across all of them is a need for greater engagement with the private sector and the broader community. Although the ASEAN Economic Community is a government-led agenda, it cannot succeed without fully engaging the business sector, and the public at large. Preparedness of the private sector has been astonishingly low, while awareness of the public equally abysmal (ASEAN-BAC 2013). This needs to change quickly if the ASEAN Economic Community is to make a difference.

Will the 2015 deadline be met?

Although ASEAN has come a long way towards realising its goal, the veracity of the challenges that remain suggests that it will fall short of the approaching deadline. Indeed, ASEAN’s latest self-assessment from March 2013, the ASEAN Economic Community Scorecard, suggests that the region had reached only 77.5% of its targets between 2008-March 2013.

Recognising that the deadline will be missed is important to ensure that work continues past the 2015 deadline. Indeed, many of ASEAN’s working groups, task forces and the like seem almost preoccupied, somewhat prematurely, with a post-2015 agenda, confirming recognition of this reality. Moreover, the Scorecard reveals that the pace of reform seems to have slowed down rather than picked up, partly due to having to move on to the more difficult parts of the reform agenda. Even if the pace were to pick up now, the real test for the ASEAN Economic Community will lie in the years beyond 2015.

Apart from hitting the remaining targets, the bigger challenge of implementing the accords legitimately lies beyond the deadline. This is no easy task when considering that domestic laws, or even the Constitution, may have to be amended to accommodate ASEAN Economic Community accords. The flexibility that characterises ASEAN cooperation and institutional arrangements, the so-called ASEAN Way, could give member states a pretext for non-compliance – and there are enforcement issues. Giving commitments more teeth is the key challenge to be overcome in realising the ASEAN Economic Community if it is to be more than a political exercise in solidarity. We should therefore view 2015 as a milestone rather than a hard target, and not a destination but rather as part of a journey (Severino and Menon 2013).

Finally, as recent disputes over property rights in the South China Sea have shown, progress on the economic front cannot be divorced from geopolitical issues facing some ASEAN member countries. Indeed, these events have reminded us that ASEAN was born as, and in many ways designed to be, a politico-security pact, and that the economic agenda is a more recent experiment. Given the interdependence between economics and geopolitics, however, the institution will have to weather the challenges that the latter poses on its cohesion if it is to progress on the former. So far, it has avoided getting involved in the geopolitics without creating too much discontent amongst its ranks. Just how long it can continue down this path of ignorance before risking collateral damage to its structural integrity remains to be seen.

References

ASEAN Business Advisory Council (ASEAN-BAC), 2013. ASEAN-BAC Survey on ASEAN Competitiveness, 2013, Singapore: ASEAN-BAC.

Hill, H and J Menon (2012), "ASEAN Economic Integration: Driven by Markets, Bureaucrats, or Both?", in M.E. Kreinin and M.G. Plummer (eds), The Oxford Handbook of International Commercial Policy, Oxford University Press, Oxford, pp. 357-386.

Lloyd, P (2005), "What is a Single Market? An Application to the Case of ASEAN", ASEAN Economic Bulletin, 22 (3), pp. 251-265.

Menon, J (2013), “Narrowing the Development Divide in ASEAN: the Role of Policy”, Asian-Pacific Economic Literature 27(2), pp. 25-51.

Severino, R and J Menon (2013), “The ASEAN Community: An Overview”, in Basu S, J Menon, R Severino and O Shresta (eds.), The ASEAN Economic Community: A Work in Progress, ADB and ISEAS, Singapore, pp. 1-30.

Sally, R (2013). “ASEAN FTAs: State of Play and Outlook for ASEAN’s Regional and Global Integration:, in Basu S, J Menon, R Severino and O Shresta (eds.), The ASEAN Economic Community: A Work in Progress, ADB and ISEAS, Singapore, pp. 320-81.

Soesastro, H (2006), "Regional Integration in East Asia: Achievements and Future Prospects", Asian Economic Policy Review, 1 (2), pp. 215-234.

WTO (2011), World Trade Report 2011, Geneva, WTO.