ASEAN: Economic Progress and Integration

The ASEAN Economic Community (AEC) is the goal of regional economic integration of the Association of Southeast Asian Nations (ASEAN).  Set to launch by 31 December 2015, the AEC will endeavor to move the region toward a more globally-competitive single market and production base with free flows of goods, services, skilled labor, investments and capital across its 10 member states.

The importance of the ASEAN region has increased enormously in recent decades. Nowadays, ASEAN is the 7th largest economy in the world and it is home of 625 million people, making its population larger than the European Unions’ or North America’s. ASEAN has the 3rd largest labor force in the world, behind China and India. Since 1990, nearly 60% of total ASEAN growth has come from productivity gains. ASEAN GDP growth from 2004-2014 was 5.4%, outpacing BRIC countries Brazil and Russia.

Going forward, ASEAN is foreseen outperforming other regional emerging market blocs such as Mercosur, Eastern Europe and the Middle East and North Africa region, with a projected growth forecast of 4.8% in 2015 and 5.2% in 2016.

AEC Mandate

The AEC envisages a region of equitable economic development and full integration with the global economy. AEC member states have targeted the following areas for deeper cooperation: macroeconomic and financial policy consultation; trade financing measures; enhanced private sector involvement for the building of the AEC; enhanced infrastructure and communications connectivity; integrated industries across the region to promote regional sourcing; human resources development; recognition of professional qualifications; and development of electronic transactions through the e-ASEAN initiative.

The Long Road to AEC

In the Declaration of ASEAN Concord II in Bali, Indonesia, made on 7 October 2003, the 10 ASEAN heads of state agreed the establishment of the ASEAN Community, which includes the ASEAN Economic Community (AEC), by 2020. In November 2007, however, the 10 member states decided to accelerate the process and moved the implementation of the AEC forward to the end of 2015.

Wealth has been growing rapidly across ASEAN and millions have already ascended into the middle class. The number of consuming households is expected to nearly double by 2025 to 125 million. Foreign direct investment has been flowing into the region (USD 136.2 billion total net inflows in 2014, surpassing that of China for the 2nd consecutive year) with multinationals hoping to capitalize on its strategic location at the intersection of China, India and Japan and its rapidly expanding middle class.

With the AEC integration plan of stronger cross-border supply chains, further reduced goods tariffs and the eventual liberalization of services sectors, the already increasing intra-regional trade should receive an additional boost.

Challenges to Reaching Potential

But many internal and external challenges must be overcome before ASEAN’s full potential is realized.

Internally, much work can be done to improve the ease of doing business across ASEAN today, which requires navigating a complex landscape of administrative policies, regulations and rules. Although the AEC is a regional initiative, economic integration can only proceed at the behest of national governments, leaving the AEC institutions relatively weak. Progress towards further liberalization and harmonization will, therefore, likely be gradual. Moreover, the ASEAN countries need to increase their capital stock, upgrade infrastructure facilities and remove bottlenecks in order to boost long-term growth.

Externally, ASEAN—one of the most open economic regions in the world—is highly vulnerable to global economic trends. Boosting intra-ASEAN trade remains a challenge, as from 2009-2014 it was stuck at roughly 24%. China’s deceleration, a sluggish recovery in Japan and still weak growth in Europe—now threatened by Greek exit from the Eurozone—are major concerns. Volatile capital flows, coupled with the region’s relatively-high external debt, China’s and America’s preference for negotiating treaties at the bilateral level, geopolitical tensions, commodity price uncertainty and the expected interest rate hike by the Federal Reserve add to ASEAN’s laundry list of challenges and downside risks.

Did you know? AEC Key Facts

  • Includes 10 economies: Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar (Burma), Philippines, Singapore, Thailand, Vietnam
  • Taken as one economy, AEC is world’s 7th largest with GDP of USD 2.5 trillion
  • On track to become the world’s 4th largest economy by 2050
  • With 625 million people, its potential market is larger than the EU or U.S. markets
  • Wages are lower than China’s in all ASEAN nations except for Singapore and Malaysia
  • FDI magnet: in 2013 and 2014 ASEAN drew more foreign direct investment combined than China 

What’s Needed for ASEAN to be Successful

Only time will tell whether ASEAN has done enough to make a successful leap toward deeper integration in the form of AEC. Member states and the ASEAN secretariat insist 80% of their objectives have been met, including the elimination of 80% of all tariffs on the trade of intra-regional goods. To date, only 50% of ASEAN businesses have utilized tariff reductions set out in ASEAN’s regional FTA. Non-tariff barriers in the form of licenses and quotas—also targeted for reduction in the FTA—remain a major obstacle to integration.

In addition to addressing impediments to trade and investment, ASEAN must pursue a range of other structural reforms if the region’s economic progress is to lead to greater convergence with the advanced economies: upgrading labor force skills through an improved educational system; boosting investment to close infrastructure gaps; encouraging home-grown innovation through increased investment, risk appetite and IP protection; and gradual financial sector integration will all help ASEAN continue its impressive success story.

What the Future May Hold

ASEAN’s process of economic integration has largely been a success story and the potential of the region is still enormous. Located in one of the most dynamic regions in the world, with an abundant labor force and a rising role in global markets, the outlook of the region looks promising. That said, many challenges remain unaddressed. The region needs a common regulation framework to encourage business and also tackle the chronic infrastructure deficit, which is dampening growth potential. Moreover, although there has been progress toward integration, governments in the region are still more concerned with developments at home than with creating a common vision for ASEAN’s future.

If the integration does succeed in lifting the standards of living and promoting sustainable economic growth across the region, ASEAN will not only be an important economic hub, but also an example for developing countries worldwide.  

Written by: Anthony Halley & Ricard Torné

Author: Ricard Torné, Head of Economic Research

Date: July 7, 2015

Tags: 

Twitter @FocusEconomics

Blog archive

Search form