AEC The Big Picture

AEC Asean Economic Community

The Big Picture

In today’s rapidly evolving economic and financial landscape spurred by globalization, ASEAN lies in the midst of the strategic and dynamic region of East Asia.  ASEAN is surrounded by vibrant emerging economies in the region such as China and India, and further west by other emerging economies of Latin America and Russia as well as Central European and Asian Republics. To maintain its centrality and pre-eminence in the region and globally, ASEAN needs to be more integrated as a grouping; more engaged with the global economy, and more dynamic and nimble to respond to changing circumstances in a rapidly shifting globalised world.  New issues and challenges are confronting ASEAN such as the financial and economic crisis, climate change, environmental degradation, energy security, food security and water security, and therefore strengthening ASEAN institutions and processes will also be crucial for the region to meet the challenges thrown up by a dynamic Asia and changing global landscape.

Few would disagree wholeheartedly that ASEAN is irrelevant in today’s context.  As a region, ASEAN Member States have worked together to ensure peace, stability, prosperity and development for all of them and the region as a whole.  The regional resilience has supported national resilience and vice versa. While there are certainly temporary hiccups in the domestic and bilateral fronts occasionally, ASEAN has undeniably enjoyed rapid growth and development in the last four decades.  The developments have helped ASEAN to be a pillar of strength and catalyst for regionalism in Asia.  This role of ASEAN has been further enhanced by its community building efforts, in particular the AEC.

 

The prospects of an integrated economic community that allows seamless movement of goods, services, investment, capital and skilled labour across the ten ASEAN countries is an attractive perspective to the investors and business community.  An AEC characterised by a single market and production base allows for economies of scale, investment flows and building of business linkages and networks conducive for promoting further commerce, which is the heartbeat of the ASEAN, and development, which is the soul of ASEAN. With the heart and soul are working hand-in-hand, ASEAN is certainly poised to achieve further progress as long as it meets the challenges on its path head on.

Prospects and Opportunities

The prospects for ASEAN and AEC are bright despite the current financial economic crisis.  ASEAN has fully rebounded from the financial crisis with its fiscal stimulus packages, which is expected to be gradually withdrawn as private demand picks up, exports increases and social safety nets are further enhanced. ASEAN countries are starting to look at exit strategies while being vigilant to any emerging risks.  This year, ASEAN is expected to achieve a combined growth of 4.9% to 5.6%, after an anaemic 1.5% in 2009 engendered by the global economic crisis.  ASEAN is at the centre of a resurgent East Asia, fostered by strong interest in ASEAN’s regional economic integration.  Several countries in ASEAN, including Indonesia, are expected to achieve impressive growth.  The signs are good for ASEAN and we are already witnessing with increase capital flows, inflation remains subdued and manageable, and our currencies appreciating. 

In terms of achievements, ASEAN has notched up several successes.  Since the adoption of the AEC Blueprint in 2007, significant progress has been made towards achieving the AEC. Beginning 1 January 2010, ASEAN-6 achieved zero tariffs covering 99.11 % and for the CLMV 98.86% at 0-5% tariff rates of the total tariff lines traded under the Common Effective Preferential Tariffs for ASEAN Free Trade Area (CEPT-AFTA) making this the most tangible high-impact outcome for ASEAN. To ensure tariff reductions are not nullified by imposing other forms of non-tariff measures (NTMs), ASEAN is working hard on trade facilitation issues to ensure NTMs do not impede trade. 

ASEAN has adopted the Trade Facilitation Framework and its Work Program to address areas in customs, trade procedures, standards and conformance, sanitary and phyto-sanitary measures to ensure parallelism in the efforts to promote trade and investment.

1 January 2010 also saw the realization of the ASEAN-China and ASEAN-Korea FTAs and the commencement of the implementation of the ASEAN-Australia-New Zealand FTA and the ASEAN-India Trade in Goods Agreement. ASEAN’s success in engaging pro-actively with its major trading partners in free trade agreements is bearing fruit.  Two-way trade has been enhanced and cements ASEAN’s central role within the region.  ASEAN’s trade with China, Korea, and Japan remains strong and is growing, while ASEAN is also expected to reap benefits from its newly signed FTAs with Australia/NZ and with India. 

ASEAN FTAs should be seen in a holistic and strategic manner and in a long-term perspective as there are compromises involved in any such arrangements.  For example, ASEAN has positioned itself well for the boom in China and India being their FTA partners as the growth pole shifts to East Asia.  As the two giants grow, ASEAN will grow with them and strengthen trade and investment ties.  The growing middle class in China and India will demand more goods and services, where ASEAN will gain first comer advantage to supply. ASEAN must continue to improve its competitive edge to leverage on these FTAs.

In the area of services, ASEAN Member States are close to completing the 7th AFAS Package of services commitments covering varying levels of commitments in 65 services sub-sectors. Better market access in key areas such as telecommunications, health and tourism are spurring cross-border investments in services.  The services sector of ASEAN receives the highest amount of FDI, accounting for 50.6% of total ASEAN FDI. ASEAN exports of commercial services to the world is showing an encouraging trend, more than doubling from US$68 billion in 2000 to US$162.8 billion in 2009.

In investment, ASEAN has witnessed a steady increase in intra-ASEAN FDI flows, accounting for 18.2% (US$10.8 billion) of total ASEAN FDI (US$59.7 billion) inflows in 2008, compared with a share of 13.82% in 2006. For the same period, total FDI inflows increased by 8.59%.  The ASEAN Comprehensive Investment Agreement, which is expected to be in effect this year, will help to market ASEAN as a single investment destination and buttress the single market and production base in ASEAN.   

In the finance sector, the enlarged US$120 billion swap arrangement under the Chiang Mai Initiative Multilateralisation (CMIM) was operationalised on 24 March 2010.  The CMIM will enable ASEAN to address any short-term balance of payment problems thereby ensuring regional financial stability. 

The establishment of the Credit Guarantee and Investment Facility (CGIF) is expected to be realised in May 2010 and this will help in the development of deep and liquid local currency and regional bond markets. An ASEAN infrastructure fund is also being developed to finance the building on regional infrastructure crucial for the building of a well connected and integrated single market and production base.

In food security, ASEAN has established the ASEAN Integrated Food Security Framework and its medium-term Strategic Plan of Action on ASEAN Food Security.  In the Energy Sector, the ASEAN Petroleum Security Agreement has been endorsed to minimize exposure and to respond effectively to an energy emergency situation.  In the transport sector, the ASEAN Multilateral Agreement on Air Services and the ASEAN Multilateral Agreement on the Full Liberalisation of Air Freight Services have been signed to provide for the creation of a single aviation market in ASEAN.  The ASEAN Framework Agreement on the Facilitation of Inter-State Transport is expected to further strengthen the transport facilitation and logistics environment. 

The development of an ASEAN single market and production base will obviously require strong regional connectivity.  In this regard, ASEAN is working towards strengthening and completing the missing transport links, particularly in land, air and maritime transport; information communications technology networks; trade facilitation measures, including the simplification and harmonisation of custom procedures and standards and conformity; and people-to-people connectivity.  Priority is being given to transport, information communication technology (ICT), energy, and cross-border facilitation for the smooth movement of people, goods and services.  In this context, a Master Plan on ASEAN Connectivity is being developed to integrate the various measures and to ensure coherent development of the ASEAN Community.

Challenges

The challenges facing ASEAN is manifold.  One of ASEAN’s main challenges is to manage the integration process within the timeframes and timelines that have already been agreed.  The recently concluded 16th ASEAN Summit has called for the speeding up of the implementation of ASEAN agreements through timely ratification of agreements and protocols as well as concrete actions.   The ASEAN Leaders emphasised the need to set-up a monitoring mechanism to ensure effective implementation, identification of priorities for each period and implementing bodies and improve the coordination among the pillars as well as resource mobilisation.  These are very important elements to be addressed if ASEAN is to see the successful implementation of the Community by 2015.

 

The Economic Community pillar has introduced an AEC Scorecard, which lists down the measures to be undertaken and the achievements to date. Thus far, ASEAN has a 75.5% achievement rate for the 2008/2009 measures.  This is only satisfactory as a number of the non-implemented measures involve the ratification of important agreements. ASEAN has to do a number of things if it is to achieve its goal of building the AEC by 2015. 

First, the ASEAN Member States must ratify agreements that they have entered into. Of the economic agreements only 73 per cent of them have been ratified by all ASEAN countries.  While the rate of ratification is expected to increase with the AEC scorecard in place now, these countries will have to look at ratifying them in a timely manner so that integration could be speeded up.  More importantly, ASEAN countries will have to transpose these regional commitments into national obligations through their respective domestic processes and at a quicker pace.  The domestic legal enactments relating to ASEAN commitments could be monitored as part of the scorecard process.  A transformation of mindset from "national interest to regional action" to "regional interest to national action" is also necessary for community-building as a whole.

Second, ASEAN countries should devote greater financial and human resources for internal integration and external engagements. ASEAN free trade agreements should be more actively monitored and implemented. The development of an ASEAN single market and production base will also require strong regional connectivity as mentioned earlier. ASEAN must invest in regional connectivity, both hardware and software.

Third, ASEAN countries should actively address the non-implementation of regional commitments, which should include capacity building to tackle any inadequacies in implementing commitments; peer reviews for sharing and learning of best practices as well transparency and confidence-building; and utilising the dispute settlement mechanism already in place to resolve issues in a rules-based manner.  There could also be specific target-setting to encourage ASEAN to achieve more.  For example, there could be specific targets for bringing down the costs of doing business in ASEAN.  A robust regional surveillance mechanism is necessary too to track emerging risks and to address them in a timely manner.

Fourth, the private sector of ASEAN must be the principal driver of regional economic integration. There should be regular sector-specific dialogues with the business community so that ASEAN can address their concerns and create a more facilitating environment for doing business in the region. More technical meetings of ASEAN in the economic arena could also be opened up to the participation of the business community, where possible.

More efforts are needed to better engage the peoples of ASEAN, in particular the civil society, the strategic think-tanks and economic institutes to tap their expertise and knowledge.  A good intellectual foundation and peoples' participation will provide a stronger underpinning for the development and consolidation of the AEC.
21. Finally, if the ASEAN private sector is the "driver" of economic integration, the ASEAN Secretariat must be the "lubricant" of this integration. The ASEAN Economic Ministers at their last meeting had given their strongest endorsement yet for an enhanced role of the Secretariat. A strengthened Secretariat can contribute more to regional economic surveillance; compliance monitoring; economic dispute settlement; and implementing major economic integration programs funded by ASEAN's Dialogue Partners. ASEAN must explore the tremendous potential of developing the ASEAN Secretariat and the Committee of Permanent Representatives of ASEAN to become progressive institutions for regional community-building.

Conclusion

The key challenge for ASEAN is to stay the course in community building as a whole. The AEC will be the catalyst for the community building.  In this more challenging economic environment, the building of the AEC will need strong leadership, vision, political will as well as strong mechanisms and institutions to support coordination and implementation.  In building its AEC, ASEAN must stay open and engage its partners to maximize the gains from the AEC given our outward looking nature of our economies.  The time left for the establishment of AEC is less than 6 years.  A greater sense of urgency is necessary to achieve the goal of AEC and to continue to maintain ASEAN’s centrality.

Pie chart scale of economic in AEC countries base on GDP

Indonesia GDP $ 540 billion

Thailand GDP $263 billion

Malaysia GDP $ 192 billion

Singapore GDP $ 177 billion

Philippines GDP $ 161 billion

Vietnam GDP 93 billion

Myanmar GDP $ 28 billion

Brunei Darussalam GDP $ 11 billion

Cambodia GDP $ 11 billion
Laos PDR GDP $ 6 billion

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