Moving slowly towards the ASEAN Economic Community-

Launched as a political bloc and security pact in the aftermath of the Vietnam War, ASEAN has evolved to embrace an ambitious economic agenda. Its latest project is to establish the ASEAN Economic Community (AEC) by December 31, 2015. Is this likely? In order to answer this question, we have to be clear about what an AEC means first. The blueprint for achieving the goal envisages the AEC as a single market and production base that is highly competitive as it pursues equitable economic development and full integration into the global economy. This vision stands on four pillars and leaders of ASEAN members have agreed on a range of actions on all four. Progress has been achieved on several fronts, but many hurdles remain along the road to establishing the AEC in 2015.

A community built on four pillars

  • Single market and production base: There have been a number of noteworthy achievements under this first pillar. The greatest success has been in tariff reduction. Following the implementation of the ASEAN Free Trade Area, the common effective preferential tariff rates between Brunei Darussalam, Indonesia, Malaysia, the Philippines, Singapore, and Thailand fell to virtually zero. As a result, more than 70 per cent of intra-ASEAN trade incurs no tariff, and less than 5 per cent is subject to tariffs above 10 per cent. With tariff largely gone, leaders need to prioritise eliminating non-tariff barriers to trade. Some progress has been made in trade facilitation and investment liberalisation. The national single window – a one-stop shop to speed customs clearance within ASEAN – has been introduced in Indonesia, Malaysia, the Philippines, Singapore, and Thailand, with full roll-out planned for all significant ports and airports by 2015. In addition, these economies now approximate international best practice in investment liberalisation. However, the four newer ASEAN members – Cambodia, the Lao PDR, Myanmar, and Vietnam – lag in both areas. Trade in services, meanwhile, has enjoyed less liberalisation partly because it has a much shorter history than trade in goods and is harder to grasp.
  • Highly competitive economic region: To achieve this second pillar, the policy on competition needs to be improved and protection of intellectual property rights strengthened. These are difficult areas to reform, and questions remain regarding how effective a regional approach can be compared with national action or a multilateral approach. Nevertheless, standards harmonisation and regulatory convergence offer considerable potential benefits to ASEAN as it develops its regional market.
  • Equitable economic development: The huge income and development disparities among ASEAN members are inconsistent with the idea of an economic community, however conceived. The Initiative for ASEAN Integration is one of several arrangements that have been proposed to help close the development gap and accelerate the integration of newer members. While such initiatives may be helpful, progress must come from within the newer members themselves as they institute broad economic reform that promotes trade and investment, as they have been doing.
  • Full integration into the global economy: The greatest progress has been made on this front, enabling a thriving Factory ASEAN to link to global value chains. The progress made so far underlines how liberalisation has been driven thus far more by market forces than by regional agreements, and that the shift from unilateral liberalisation to preferential liberalisation through free trade agreements has not promoted further external opening or domestic reform because such agreements are often weakened by politically expedient exemptions. ASEAN’s long-standing commitment to openness is one of its defining features and needs to be burnished to sustain and advance regionalism in Southeast Asia.

Each of the four pillars presents a demanding set of challenges to be met before the AEC can be fully realised. A cross-cutting challenge is to achieve greater engagement with the private sector and the broader community. Meanwhile, efforts to prepare the private sector have enjoyed negligible success, and public awareness is equally abysmal.

The 2015 deadline and beyond

Although ASEAN has come a long way toward realising its goal, the challenges that remain suggest that the AEC will not meet its approaching deadline. Indeed, the AEC Scorecard, ASEAN’s self-assessment mechanism, suggests that the region achieved only 76.5 per cent of its AEC targets that were due by March 2013. Moreover, this does not take into account the additional targets that will fall due from April 2013 to December 2015. It further reveals that the pace of reform seems to have slowed down rather than accelerated, partly because the process reached the more difficult parts of the reform agenda. Even if the pace pickes up now and ASEAN manages to achieve its remaining targets and meet its deadline for inaugurating the AEC, the real test for the community would lie in the years beyond 2015.

Accommodating AEC accords will not be easy when they require changes to domestic laws or even the national constitution. The flexibility that characterises ASEAN cooperation, the celebrated “ASEAN way”, may give member states a convenient pretext for non-compliance. How to enforce the accords remains an issue, and giving the commitments more teeth is a challenge to overcome towards ensuring that the AEC is realised as more than a display of political solidarity. n

Jayant Menon, PhD, is a lead economist in the Office for Regional Economic Integration at ADB, where he works on trade, international finance, and development issues. Prior to joining ADB, he worked as an academic in Australia for more than a decade, spending most of his time as Senior Research Fellow at the Centre of Policy Studies at Monash University in Melbourne. He has also worked at the University of Melbourne, Victoria University, and the American University in Washington, DC. He serves on the Advisory Board of the University of Nottingham Campus in Malaysia, and is a former Board Director of the Cambodia Development Resource Institute.