The ASEAN region is entering a critical year as it prepares to declare itself an integrated economic community. As home to 10 percent of the world’s population it will rank as the world’s seventh largest market, with a combined GDP of $2.4trn that is expected to grow 5.1 percent this year. This is well above the 3.5 percent global growth projected by the IMF, and, fuelled by an boost in annual FDI net flow, the region is expected to outperform the US, EU and Japan. With such enormous potential, and borders set to open between the 10 member countries, the free flow of goods and services is fast becoming a reality. But geopolitical tensions and differences in economic models have led to growing scepticism over integration within an already fragile region.
The AEC blueprint
Born almost five decades ago, the ASEAN member states have previously struggled to create a real impact on integration with only 30 percent of agreements implemented from 1967 to 2007. Since the blueprint of the AEC was signed, 90 percent of targets under the three ASEAN community pillars have been met and a number of regional relationships forged. With the deadline less than 10 months away, committees are being formed, work plans adopted and inter-governmental agreements concluded in order to bring an EU style integrated region into the global economy.
With the third largest labour force in the world, ASEAN nations have outpaced the rest of the globe with income growth remaining strong
Speaking to World Finance, a US Department of State official said: “It is up to the members of ASEAN to decide where their EC is headed, and the EU is one model for them to consider. Establishment of the AEC is an important milestone, which will make it easier to do business in the region. When trade is easier, when barriers are reduced, human potential is unlocked and that’s a big accomplishment.”
Creating a single market
ASEAN member countries are currently at varying levels of economic development, from the richest Singapore to the poorest Myanmar. The middle-class community, believed to total 144 million people has risen from 15 percent in 1990 to 37 percent in 2010. Creating a single market would allow member states to appeal to the demand from this growing middle class, utilise the $5.3trn global trade that passes through its waterways every year and benefit from its ideal geographical location.
As the fourth largest exporting region in the world, the member states of the AEC account for seven percent of global exports and are an attractive investment due to their sophisticated and diversified manufacturing capabilities. Vietnam is currently a global producer of textiles, Malaysia is leading the way in electronic exports and Thailand has become a major player in the vehicle and automotive-parts industry. Integrating these nations will create an economic powerhouse and with demand from the US, Europe and Japan continuing to propel growth, even former competitor China has become an ASEAN customer.
Speaking to World Finance, Derek Kidley, PwC Asia Pacific Advisory Leader, said: “The AEC is a potential game changer for ASEAN. We see it as creating an opportunity to do things differently and rethink both strategy and direction. It’s expected to provide new opportunities for existing businesses, and greater opportunities for new businesses looking to enter into the region. With a focused strategy and the access to the right talent, all companies should find it easier to do business across ASEAN.
“From the territory point of view, there is wide support for the AEC; they want it to succeed, but success will very much depend upon pulling together the wide range of skills and experience needed to execute and implement the roadmap.”
Challenges to integration
Establishing this roadmap is, at present, hindered by a number of obstacles including vast differences in political and economic models. This variance means that some countries are benefiting more from the unified marketplace than others. According to recent findings from Baker & McKenzie, Singapore is the preferred base for 80 percent of multi-regional companies due to its open markets and international finance hub, with Thailand losing out to more politically stable emerging markets offering low-cost labour and more favourable business regulations.
Product standards have yet to be streamlined across the nation, making it difficult for companies to sell across the AEC despite progress in cutting tariffs across the region. These non-tariff barriers are believed to have attributed to the fall in intra-regional trade across ASEAN, which dropped to 24 percent of total trade in 2012. Differences in regulation looks set to hinder the creation of free flowing goods with the biggest barrier being protectionism and resistance to foreign industries. This avoidance covers not just international countries, but also neighbouring ASEAN nations where there is already evidence in the motor sector that Indonesia is determined to create a policy that favours its domestic industry.
Speaking in a statement, Benjamin Shatil, regional Asia economist at JPMorgan, said: “Integration within ASEAN will be a key boost to the region’s economic growth in the medium term. We are already seeing a striking increase in intra-regional trade both within ASEAN and among emerging Asia’s economies more broadly.”
With the third largest labour force in the world, ASEAN nations have outpaced the rest of the globe with income growth remaining strong and the population is fast becoming a pivotal consumer market. But in a nation made up of a kaleidoscope of languages, religions and cultures the most difficult task may lie within the businesses community, as Vietnamese officials commented that 60 percent of the country’s businesses are unaware of what the AEC is.
The free flow of goods, services and labour is expected to transform the business potential of Southeast Asia and simultaneously create the biggest emerging market in the world. The ASEAN region looks ready to go but, with three constitutional monarchies, two communist states, three republics, a sultanate and a former military junta to appease, as well as a number of socioeconomic challenges to overcome, appearances can be misleading.