ASEAN Economic Integration: Opportunities and Challenges to the 2015 Deadline

The ASEAN Economic Community (AEC), a regional initiative designed to transform Southeast Asia into a more unified and competitive market zone, is scheduled to go into full effect in December 2015. Yet doubts remain that the current schedule will be met. While some commentators show signs of optimism, others believe that the AEC, and in some cases ASEAN itself, is doomed to failure.

ASEAN Economic Integration: History and Progress to Date

In the long-term history of ASEAN, the current drive towards regional economic integration is a relatively recent phenomenon. When ASEAN was initiated in 1967, it was structured primarily as a regional peacekeeping and security bloc by its founding members (Thailand, Malaysia, Singapore, Indonesia and the Philippines), who sought to counter the growing threats of communism and intervention from outside powers that had turned much of Indochina into a war zone at that time. By the time Brunei joined in 1984, economic development was a discrete part of the agenda as well, but it wasn’t until the 1990s, and especially the late 1990s when the so-called CMLV countries (Cambodia, Myanmar, Lao PDR and Vietnam) were admitted to the organization, that efforts to promote genuine economic integration began in earnest.

The first major step towards economic integration came with the ASEAN Free Trade Agreement (AFTA) in 1992, which reduced tariffs and non-tariff barriers to intra-ASEAN trade. Under the AFTA, intra-ASEAN tariffs were capped at 5% (with exceptions for a few classes of “sensitive” goods) for all of the six nations that comprised ASEAN (ASEAN-6) at the time. When the CMLV countries later joined ASEAN, they also signed on to the AFTA, although they were given a more lenient schedule for reducing tariffs because their relative underdevelopment rendered many of their industries more vulnerable to shocks from rapid trade liberalization.

From the start, the CMLV countries presented challenges to the integration process, but by the mid-2000s, headway was made nonetheless. According to a report by BCG, average regional tariffs fell from 4 to 2 percent between 2002 and 2008, boosting intraregional trade from $155 billion to $415 billion, while data from the ASEANstats database shows that intra-ASEAN FDI increased in kind over that time period, expanding from $3.8 billion to $9.4 billion. The global economic meltdown of 2008 caused reversals in expansion of economic activity, but by 2010 intra-ASEAN FDI growth resumed, hitting $12.2 billion in that year.

Inspired perhaps by the progress that was made under the AFTA, the ASEAN member states agreed in 2007 to take economic integration to the next level by forming an ASEAN Economic Community (AEC), which they committed to realizing by 2015.  According to the AEC Scorecard, a report produced by the ASEAN that lays out the goals of the AEC, the AEC has four “pillars”:

  • Creation of a single production and market zone in which all Southeast Asian states retain national sovereignty but eliminate virtually all tariffs and open their borders to a much freer flow of trade, capital, investment and labor.
  • Enhancing the economic competitiveness of the region through various measures designed to promote ease of doing business, including infrastructure development projects, better consumer rights and IP laws, and policies designed to foster competition.
  • Promoting equal economic development through policies that are designed to bridge the development gap between the countries richest and poorest members.
  • Enhancing integration into the world economy by concluding free trade agreements with external powers.

In addition to laying out the goals of the AEC, the Scorecard provides a self-assessment of ASEAN’s progress towards achieving them. To date, AEC authorities report that they have met 67.5% of their current targets. They state that the AEC has made the most progress in its efforts to integrate into the world economy, as evidenced by the enactment of free trade agreements criss-crossing the Asia-Pacific region, and so far met about two-thirds of its targets on the other pillars.

Obstacles to Further Integration

Although the AEC Scorecard indicates genuine progress towards greater economic integration, many analysts are skeptical of the AEC’s current self-assessment and future prospects, particularly with regard to meeting its 2015 deadline.

One such analyst is Joshua Kurlantzick, a Southeast Asia Fellow at Council of Foreign Relations. In a working paper on the future of ASEAN integration that came out earlier this month, Kurlantzick argued that the AEC probably will not meet its current deadline, and ASEAN as a political organization more generally is “unlikely to move beyond its current status” due to “limitations in working style, staffing, and mandate, as well as the enormous political and economic disparities among its members.”

Kurlantzick credits ASEAN with leading Asia in promoting inter-regional free trade agreements, and playing an important part in region-level monetary stabilization programs as well, but he believes that efforts to promote greater intra-ASEAN economic integration are hampered by “nontariff barriers, poor dispute resolution mechanisms, carve-outs for dozens of protected ‘sensitive’ industries, and other problems.”

One of these “other problems” is ASEAN’s consensus style of governance, which requires the association’s member states to achieve unanimous assent on any policy before it is launched as a regional initiative. This enables any member state, no matter how small or removed from the policy being discussed, to exercise effective veto power on all ASEAN initiatives.

As an example of how the need for consensus has hampered economic integration, Kurlantzick’s paper cites disagreements on infrastructure projects, such as regional highways and railways, that have prevented the AEC from fully realizing its stated goal of creating a more connected regional landscape. He also points to ASEAN’s more dangerous failure to forge a unified position on the South China Sea disputes as evidence that the organization is not together enough to engage in joint resource development projects or even defend its basic territorial interests in this contested region.

Kurlantzick’s concerns about the future of the AEC are echoed by Murray Hunter, another analyst of the region who wrote an article about ASEAN integration for the New Mandala in 2012. The article contains some factual inaccuracies and could have used some editorial polish, but it nonetheless raises several points worthy of consideration. One of his principal points is that many of ASEAN’s member states are currently “facing watershed issues that may well set out how their respective societies will look for many generations,” resulting in most political leaders maintaining an inward rather than a regional focus.

Hunter also argues that the AEC lacks broad support within the Southeast Asian business community. He posits that many Southeast Asian conglomerates are “lukewarm” to the concept of regional integration because they are “well connected in their own countries and haven’t historically done well business wise [sic] in countries within the region where their connections are weak,” indicating that they “may actually enjoy the current protection that is afforded them from outside competition.”

Hunter further posits that the SMEs that account for the bulk of businesses in the region have little or no stake in economic integration at all, except in the case of those that relate to tourism. His article concludes with a list of miscellaneous additional barriers to economic integration, some of which are covered by Kurlantzick and some of which appear to be unique to Hunter’s analysis.

The Prevailing Mood on the AEC Today

For many of the reasons enunciated by the various commentators discussed above, discouragement about the present state of the AEC has mounted in recent months, especially since the schedule was pushed back nearly a year from January 1 to December 31, 2015. While some of the global consultancies that publish on the region have maintained a generally optimistic tone on the prospects for further integration, and some media accounts present the AEC as a foregone conclusion, others like Kurlantzick and Hunter are skeptical.

With the AEC still three years away, however, the outcome of regional economic integration efforts remain hard to predict, calling for close analysis of the integration process as it unfolds.

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