China Daily Asia Weekly - Unleashing ASEAN’s full potential

Five decades after its founding, the Association of Southeast Asian Nations (ASEAN) is ready to be a game changer in global affairs while unleashing a tidal wave of business opportunities with the expected launch of a common market at the end of this year.
The ASEAN Economic Community (AEC) will create the world’s seventh largest economy with a combined GDP of $2.4 trillion (according to 2013 figures) and a young population of over 600 million. The pace of growth, demographic dividends and economic potential of the region have positioned ASEAN as a significant global player.
In a report titled ASEAN: The Next Horizon, the Australia and New Zealand Banking Group (ANZ) painted a positive picture of the region’s economy in the next decade and a half.
Trade is expected to soar close to $5 trillion — $1 trillion from intra-regional trade within Southeast Asia and $3.7 to $3.8 trillion from trade with the United States, China, Europe and Japan. GDP growth for the 10 member states of ASEAN is estimated to range between 6 and 8 percent, and foreign direct investment (FDI) of $100 billion is projected to flow into the region.
“As China’s growth slows in the next 10 to 15 years, the way the world manufactures will change. And critically, where it consumes will also change — it is consuming in ASEAN,” said Andrew Geczy, CEO of international and institutional banking at ANZ. “Greater integration is essential to realizing this potential.”
Geczy was speaking at a China Daily co-organized roundtable discussion held as part of the 12th ASEAN Leadership Forum in Kuala Lumpur on April 27.
With the theme of Deepening ASEAN Integration and Strengthening Competitiveness, the meeting focused on the creation of the kind of seamless connectivity needed to realize the AEC’s goal of a single market and a single production base.
Co-organized by the Asian Strategy & Leadership Institute, a think tank, and the Ministry of International Trade and Industry of Malaysia, the overall forum was held in conjunction with the 26th ASEAN Summit which also took place in the Malaysian capital.
Vivek Pathak, regional director for East Asia and the Pacific at the International Finance Corporation (IFC), echoed Geczy, saying that economic integration has become a necessity for ASEAN.
“Companies invest in countries that are either a large market or where they can produce competitive goods,” Pathak said. “Between China, Japan and emerging India, each of the individual ASEAN countries are going to find it harder to compete.”
With the AEC, the region gains strength in numbers, becoming a mega market of consumers while opening up the borders of ASEAN for businesses.
“Unlike the single market model — like the European Union where the strong get stronger and the weak have to exit the market — the AEC model allows inclusive integration,” said Hidetoshi Nishimura, executive director of the Economic Research Institute for ASEAN and East Asia (ERIA).
But maneuvering ASEAN’s diversity is no simple task. A double-edged sword that is both a source of opportunity and a challenge, the fractious nature of the region extends to almost every facet of life — politics, governance, regulations, infrastructure, education, healthcare, culture and more.
The World Bank’s Ease of Doing Business Index provides a snapshot of just how different the 10 ASEAN nations are. While Singapore sits in first place, Myanmar is ranked 177 out of 189; Brunei, Cambodia and Laos all fall below the top 100 countries.
The development gap between the ASEAN-6 (Brunei, Indonesia, Malaysia, Singapore, Thailand and the Philippines) and Cambodia, Laos, Myanmar and Vietnam (collectively known as the CLMV countries) is often so vast, the idea of a cohesive ASEAN community seems like a pipe dream.
Yet the panelists were largely positive about the AEC, even if it is unlikely to materialize fully this year as envisioned.
“You couldn’t pick 10 countries that are more dissimilar and yet there is an organic process driving them towards a sense of community,” said Justin Wood, director for Southeast Asia and India with the Economist Corporate Network.
“I think we should be more optimistic about the AEC; we’ve come a long way,” added Pradap Pibulsonggram, Thailand’s representative to the ASEAN High Level Task Force on Connectivity and ASEAN Connectivity Coordinating Committee.
Pointing to the progress made in transport integration, Pradap reported that seamless connectivity in mainland ASEAN via land transportation is becoming a reality with improvements to roads and supporting infrastructure.
This year should also see the finalization of the framework for easier cross border movement of people and goods over land.
“There are specifications for a number of professions that allow ASEAN citizens to work across the region in the tourism sector. Integration is happening,” Pradap added.
Moving across borders
Similarly, private sector and private citizens are integrating across ASEAN.
“The number of cross border tourists in ASEAN in 2000 was 15 million,” said Wood. “Last year it was 45 million. And we are seeing the same in trade and investments. So people, money and companies are moving across borders in Southeast Asia.”
In Redrawing the ASEAN Map, a report published in January by The Economist, more than three quarters of the 200 multinationals surveyed said they were increasingly organizing themselves around the bloc and developing strategies specifically for Southeast Asia.
“Companies are increasingly thinking of ASEAN as one instead of 10 countries and implementing strategies as one even though it is a long way to go and barriers remain,” Wood said.
One of the key drivers has been the harmonizing of consumers. Customers are becoming more similar in their preferences, allowing companies to adopt a regional approach in their production, supply chain and go-to-market strategies.
However, for the AEC to move forward, regulators must still accelerate the reconciliation of cross border regulations and build a consistent interpretation of regional commitments, without which the ideal of a single market and single production base will be difficult to realize.
“If you look at manufacturing and logistics, you have high- to medium-tech industries in a number of countries and low- to medium-tech industries in a number of countries,” Pathak of IFC explained. “In an integrated ASEAN, you could have a large factory with each country playing to its strengths and it could give you a far more competitive product.”
The pace at which regulatory harmonizing is happening, however, has been largely frustrating.
ERIA’s Nishimura is of the belief that government mindsets need to change. “Regulators need to be more responsive, to look at their roles as facilitators of the AEC,” he said. “Because the reality is, businesses want to be connected.”
Wood, however, urged companies not to wait for the right situation or environment to integrate.
“I think if you asked, no business is satisfied with the pace. The ASEAN secretariat acknowledges that it is running behind schedule,” he said. “But companies should move in the expectation that ASEAN will catch up.”
More attention is also needed in regulating financial services and developing financial markets to support the AEC’s single market, single production base goal, and in the longer term to facilitate freer movement of funds across borders.
“Integrating stock and bond markets will reduce transaction costs, facilitate cross border flow of funds, draw analyst coverage as part of a bigger bloc, all resulting in capital flows from larger economies to smaller economies,” Pathak reasoned.
Deepening integration
Closer cooperation between the AEC and the “two super regionals” driven by China, namely, the Asian Infrastructure Investment Bank (AIIB) and the One Belt, One Road initiative, may be critical to this as well as to deepen integration, said Edward Chen, distinguished institute fellow and honorary professor at the University of Hong Kong.
“Financial development and coordination are underdeveloped in ASEAN with attempts being more defensive and based on regulations rather than market development,” Chen said. “I think it is time for AEC to work with the super regionals to put more emphasis on developing the bond market, new financial products and coordinate the markets in ASEAN and Asia.”
Chen, who is also president of the Qianhai Institute for Innovative Research, suggested the region should look at how it can capitalize on Chinese FDI outflows.
“The history of ASEAN’s economic development has been via FDI, which has played a crucial role in integration. Today there are trillions ‘waiting to go out’ from China whether through mergers and acquisitions or greenfield investments. ASEAN should look at how it can capitalize on this and work with Chinese investments.”
This year marks a milestone in ASEAN’s journey rather than an arrival point. It is important, however, to question what is in store for ASEAN and the AEC beyond 2015.
Nishimura said the remaining challenges are not easy.
“I think, to move beyond 2015, we have to cultivate a deep sense of an ASEAN identity to realize a highly connected, integrated, cohesive and globally significant community,” he said.
“We need to invest in the sociocultural development of ASEAN to support the economic aspiration. ASEAN has to be inclusive and caring; resilient and sustainable; dynamic and globally competitive.”
Economic transformation cannot happen in isolation and, more crucially, development must be equitable and inclusive.
Geczy from ANZ said: “We have to accept and recognize that each country is at a different stage of evolution; there are different strengths and weaknesses, different competitive abilities.”
The challenge in integration is to recognize differences exist, he said, adding that each country must be allowed to evolve and integrate at different levels.
“With the right regional leadership to accelerate the AEC, ASEAN will become a center of manufacturing excellence and, more importantly, source of consumption for the world economy,” Geczy added.

Source:
http://www.chinadailyasia.com/2015-05/01/content_15258313.html