ASEAN, or the Association of Southeast Asian Nations, was founded in 1967 “to strengthen further the existing bonds of regional solidarity and cooperation.” Originally built as a political alliance to limit the spread of communism in South East Asia, ASEAN gradually became a diplomatic organisation to manage regional issues and expand trade with the inclusion of Vietnam, Cambodia and Laos. The ASEAN bloc, comprises Singapore, Malaysia, Thailand, Indonesia, the Philippines, Vietnam, Lao PDR, Cambodia, Myanmar and Brunei Darussalam.
Key Facts (McKinsey):
- With a with a combined GDP of $2.4trn (2013) if ASEAN were a single country, it would be the 7th largest economy in the world
- Home to more than 600 million people, it has a larger population than the European Union or North America
- ASEAN has the third-largest labour force in the world, behind China and India
- 22% of ASEAN’s population lives in cities of more than 200,000 inhabitants and these urban areas account for more than 54% of the region’s GDP
- ASEAN is the 4th largest exporting region in the world – accounting for 7% of global exports
- The ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) attracted more Foreign Direct Investment (FDI) in 2013 than China ($128bn versus $117bn).
The ASEAN Economic Community (AEC)
ASEAN appears to be moving forward with a number of plans including the creation, in December 2015, of the ASEAN Economic Community (AEC) heralding the “awakening” of what could be defined as a new Asian power bloc. Not unlike the European Union, it’s five core principles are the free flow of goods, services, investment, capital and skilled labour. However, where the AEC differs is that unlike the European Union, AEC aspires for economic and financial integration without a monetary union or political integration.
The implementation of the AEC is ASEAN’s most ambitious undertaking and it will boost the region’s GDP by 5% by 2030 said HSBC Global Research in a November 2015 report. However, Joseph Incalcaterra, Asia-Pacific economist at HSBC Global Research, makes it clear that “the AEC represents an important new chapter rather than inflection point.” Similarly, a Mizuho Bank note cautions against expecting a “big bang” from the roll-out of AEC. Incalcaterra says: “The free trade in goods is largely a fait accompli, and the free flow of skilled labour [remains] complicated due to political concerns, which leads us to believe that the liberalisation of services and investment are the most important parts of the AEC and can bring about the most tangible economic benefits.”
ASEAN finance officials have adopted a new timeline for integrating financial services across the bloc, aiming to tear down market barriers more quickly. Under the ASEAN Banking Integration Framework, the core of the effort, banks within the bloc that fulfil certain requirements are designated “Qualified ASEAN Banks”, letting them undertake business in all member states. The new timeline also calls for creating by 2025 a system allowing eight of the 10 ASEAN members to share bond market disclosures and a framework for retail investors to buy government bonds. Those policies aim to make fundraising within the bloc simpler and more flexible, speeding infrastructure development.
While regional integration efforts have intensified at varying levels over the years, given ASEAN’s extremely weak institutional base, reliant on a skeleton secretariat of no more than 400 staff sustained by an annual budget of barely $17m, there is much uncertainty as to whether ASEAN can deliver on its ambitious targets.
Analysts at the OECD believe current efforts are still not enough to achieve integration targets. According to the OECD in its 2016 report on the economic outlook of the region, ASEAN countries need to take active steps to realise a single economic market by 2015 and beyond and make additional efforts, including: i) co-ordinating between regional initiatives and national agendas, and regional and sub-regional initiatives, avoiding duplication and moving in the same direction; ii) reducing disparities in the region by supporting the further development of the CLM counties (Cambodia, Lao PDR and Myanmar); iii) moving towards a “Global ASEAN” that is integrated in the global economy; and iv) strengthening monitoring capacity through better indicators and peer learning to make the regional agenda more effective.
The best of the bloc
Indonesia represents almost 40% of the region’s economic output while Myanmar, is still a frontier market working to build its institutions. GDP per capita in Singapore, for instance, is more than 30 times higher than in Laos and more than 50 times higher than in Cambodia and Myanmar.
According to the OECD in its report ‘Economic outlook for Southeast Asia, China and India 2016’ Growth in the ASEAN region is projected to average a GDP growth of 5.2% over 2016-20, led by growth among the ASEAN-5 countries [Indonesia (5.5%), Malaysia (5%), the Philippines (5.7%), Thailand (3.6%) and Vietnam (6%)] and the CLM countries [Cambodia (7.3%), Lao PDR (7.3%) and Myanmar (8.3%)]. Brunei Darussalam is forecast to growth by an average GDP of 1.8% and Singapore 2.6%.
The Philippines and Vietnam are projected to show robust growth at an annual average rate of around 6% over 2016-20. Vietnam’s growth has been led by a rapid acceleration of fixed investment, strong FDI inflows and robust consumption. The Philippines has benefitted from strong momentum in domestic demand and from a significant improvement in its attractiveness as an FDI destination.
Growth in the CLM countries (Cambodia, Lao PDR and Myanmar) is projected to lead the ASEAN region, with real GDP growth rates of more than 7% over 2016-20. Growth in Myanmar, which is now the fastest in the region, should continue to accelerate as FDI continues to rise and as economic reforms spur the private sector’s rapid development according to both the OECD and the World Bank.
Labour shortages and slowing productivity will keep Singapore’s real growth noticeably below the pace of 2003-07. Singapore’s weak performance is largely attributable to slowing domestic demand.
There are still integration hurdles before ASEAN achieves it’s full might
The Diplomat (Jan-16) summaries the challenges facing AEC. “Many analysts have pointed out that integrating ASEAN economies would create the world’s 7th-largest single market. However, taking advantage of this market requires dealing with its complexities and contradictions, and accommodating the vast differences and national sensibilities. Although 95% of tariff lines are at zero, non-tariff barriers on goods and services render cross-border trade particularly painful. Consumer laws, intellectual property rights, land codes, and investment rules have yet to be harmonised at the regional level, while the lack of common, integrated banking structures, alongside the absence of an agreement on common and acceptable currencies, are likely to hinder market access for regional small and medium-sized enterprises. Given the wide development gaps between countries, combined with the lack of solid and inclusive institutional structures and agencies to govern the newly formed markets under the AEC, ASEAN as an economic project is likely to emerge as a chain of disparate markets, divided between fast-growing modern economies (ASEAN-6) and inward-looking poor countries.”