By Hugo Brennan, Verisk Maplecroft
When the Association of Southeast Asian Nations (ASEAN) launches its economic integration project in December this year, it could provide the region with the impetus to become a key emerging market powerhouse. However, the 10 country grouping needs to overcome several significant hurdles if the proposed ASEAN Economic Community (AEC) is to succeed in freeing up trade and commerce between member states.
Chief among these is ASEAN’s institutional weakness, which is hampering efforts to bring together diverging national interests and counteract economic protectionist sentiment in key members, such as Indonesia. Many countries in the bloc also face difficult political realities on the domestic front which have the potential to divert attention away from the goal of integration. The success of the AEC will hinge on these factors, but whether it prospers or flounders, foreign businesses in the region will face a changing investment landscape that they need to be prepared for.
A major investment opportunity
Taken as a whole, ASEAN ranks as the seventh largest global economy with a collective GDP of over US$2.4tn. The bloc is well set to receive manufacturing capacity that relocates from China and represents an attractive prospect as a consumer market. It is no surprise then that robust regional growth forecasts suggest that the combined economies of South-East Asia will be a crucial, long-term driver of the global economy.
The AEC blueprint envisions a fully integrated economic community that would allow a free flow of goods, services, skilled labour and investment, and a freer flow of capital. An integrated market would be a boon for Western multinationals that would benefit from lower production costs, greater investment opportunities and increased innovation.
If the AEC is successfully implemented, standardised legal and regulatory frameworks will make it much easier to do business across the region, although companies will need to adopt a regional strategy to take advantage of the shifting investment landscape.
A loss of impetus towards the AEC, however, will threaten ASEAN’s aspirational GDP growth target from 2011 to 2030 of 6.4 per cent average yearly growth, as well as undermine the regions’ competitiveness both as a production base and market. Moreover, if the project were to fail, investor confidence would be undermined as the organisation’s ability to set aside divergent national interests is called into question.
Economic integration: A bridge too far?
Realising the AEC’s full potential is likely to be challenging. What ASEAN needs more than anything is a powerful supranational body, something akin to the Commission in the European Union, which could compel its disparate members to comply with their pledge tointegrate.
Unfortunately, the project is reliant on an understaffed and underfunded ASEAN Secretariat that is too weak to act as an effective driver of regional harmonisation. Significantly, the secretariat lacks the powers to impose sanctions on non-compliant states, due to ASEAN’s long-standing commitment to the principle of non-interference in the internal affairs of its member states.
The lack of enforcement powers could prove an Achilles heel, with scepticism over the benefits of regional integration perhaps most pronounced in the bloc’s largest economy. Cross-party support for economic nationalism in Indonesia suggests that progress towards the AEC will face significant resistance in the year ahead.
Most notably this is coming from President Joko Widodo, who has made it clear to member states that integration will not come at the expense of Indonesia’s national interest. Indonesia fears that the liberalisation and integration of its investment market in key sectors, such as financial services, will leave domestic companies unable to compete with those from ASEAN’s more developed economies, particularly Singapore and Malaysia.
Domestic distractions undermine political impetus
Outside of Indonesia, political and military power brokers in Thailand, Myanmar and Vietnam will remain focused on cementing or securing power for the next few years, while uncertainty over who may succeed President Aquino and falling oil prices are diverting attentions in the Philippines and Malaysia respectively.
If domestic issues during this critical year for the AEC take precedence over regional considerations, a loss of momentum in at least some of these countries seems the most likely outcome, pushing integration off course for the medium-term at least.
AEC launch: a milestone not a target
The twin threats of an organisation too weak to compel key states to play ball, alongside a membership that has its hands full with domestic issues, suggest that the road to the AEC launch will indeed be a rocky one. It seems highly likely that some of the more challenging elements of the AEC blueprint – such as the removal of non-tariff barriers – will remain unimplemented on 31 December 2015. This is perhaps not surprising given the vast difference that member states exhibit in terms of political structures and economic development.
Ultimately, the AEC launch should be considered an ambitious marker along a lengthy and arduous road to a truly-integrated economic community, rather than an end in itself. Barring a Herculean unified effort by member states over the coming months, it will be years (perhaps even decades) before ASEAN can realistically be considered an integrated economic bloc. An understanding of this reality is crucial for foreign investors if they are to effectively navigate the important long-term shifts that are afoot in this dynamic marketplace.
Hugo Brennan is a Senior Asia Analyst at Verisk Maplecroft
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