AEC reminded of integration challenges

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For Surin Pitsuwan, ASEAN Secretary-General, the ASEAN Economic Community is “still on track”

With only a little more than three years to go, the ASEAN Economic Community is far from being a concrete concept. Though the ten-member bloc shows strong self-confidence with regard to its economic capabilities, the way of how to establish a single market and production base is still unclear, as is the procedure of how to streamline the countries’ competitive advantages.

By Arno Maierbrugger

No wonder that concerns are building up the closer the date comes. This week, Surin Pitsuwan, Secretary-General of the Association of Southeast Asian Nations (ASEAN), said that the AEC is likely to be delayed by a year until the end of 2015 because some countries were not ready. The first tier of the bloc would therefore not start on January 1, 2015, as planned, but on December 31, 2015, as “a number of challenges need to be addressed, including bridging development gaps between member countries,” as Pitsuwan put it.

The ASEAN Economic Community (AEC) shall be the goal of regional economic integration of ten member states by 2015 and 2020, respectively. The AEC envisages a single market and production base, a highly competitive economic region, a region of equitable economic development and a region fully integrated into the global economy.

So much for the theory. ASEAN countries have good reason to combine their economic strengths, as the bloc currently is one of the best performing economic regions in the world.

However, the blueprint for the European Union set up in the 1950s had a similar goal: to bundle and concentrate individual and sovereign states in an economic powerhouse. The EU plan was highly sophisticated and well-wrought, nonetheless it didn’t work out. Today, the EU is on the brink of bursting apart, and for one major reason: The countries that have been tied together to a single economic zone with a joint currency were too different.

It turned out that, for example, Germany and Greece, Sweden and Spain, or France and Italy do not have that many things in common that would allow them to act in concert. Northern Europe states, with a population said to be predominantly diligent, hard-working and tax law-abiding, are contrary to Southern Europe, whose population is said to be more laid-back, roguish and casual.

And so it happened that while Germany and other rich northern states worked hard to develop the economic union further, Greece simply sent fictitious state budget reports to Brussels indicating that its economy is doing well within the strict regulations of the bloc.

This wasn’t true. The worst came when Greece had to declare itself bankrupt over its sugarcoated budget reports and did what it was expected to do: Holding out a tin up towards Brussels and cry for financial support.

What does this mean for ASEAN? It means that the architects of the AEC have to be very careful it their planning and learn from these mistakes. It is obvious that nations such as Singapore and Laos or Brunei and the Philippines are extremely diverse, with the economic and political rift being much deeper than between Germany and Greece, for instance.

One good step was it to split the creation date for the AEC. The union is scheduled to commence by 2015 for the founding members Indonesia, Malaysia, the Philippines, Singapore and Thailand. By 2020, Brunei, Cambodia, Myanmar, Laos and Vietnam are expected to join.

Seen from a best-case scenario, an AEC would seem to be a hugely positive initiative for the development of the ASEAN economies. However, this needs a common commitment by all member states to support the AEC. Yet there are some difficulties in realising it.

Many barriers have still to be dismantled. These include cumbersome customs procedures, diverse product standards and requirements and a lack of connectivity in cross-border transportation and telecommunications, which are far worse preconditions than for the European Union when it was established.

As such, ASEAN is also far from being a single production base in which manufacturing operations could be linked seamlessly across the region.

Moreover, during numerous meetings at government level in the past it turned out that not all of the ASEAN member countries are willing and able to move at the same pace, which has to do with very diverse political structures in the member states and with the big difference between high-, middle- and low-income economies within the bloc.

When the EU was established, all the joining members were free democracies that were asked to commit to the bloc via national referendums. In ASEAN, this is very unlikely to happen. The region consists of a mixture of democracies, two communist one-party states, a recently overturned military regime, an authoritarian city state and a sultanate far from being democratically ruled.

Open gaps

How can the monetary systems in the AEC be aligned? How can a country like Brunei, that has no central bank and has its interbank interest rates set amicably between the banks, obey to a new ASEAN Central Bank? Where should such a bank be located? How can a country like Myanmar be integrated into a joint currency or at least a currency band within the member nations’ currencies? Currently, the new monetary system of Myanmar is so volatile that the speculative injection of only a few $100 million could cause the system to burst and tear down the rest.

The structural differences among ASEAN members appear to create a reluctance to give up their national policies; for instance, in relation to the huge discrepancies between the member states in their average external tariff levels. Another example is the widely divergent stages in each member’s services sector. Hence, there exist wide development gaps within the bloc.

The next problem is that ASEAN member countries are very much dependent on external trade and thus are more competitive than complementary in structure. They are producing a narrow range of similar primary products and labour-intensive manufactured goods for export.

Other key questions are how leaders from ASEAN will better link the region’s transportation infrastructure, health systems and institutions to maximise convergence of people, goods, services and economic hubs?

How will governments and institutions develop the financial policies to manage inflation, capital outflows, commodity price volatility and balanced growth towards greater domestic and regional demand?

How will the region leverage its demographic dividend and technology base to develop models to increase growth through innovation, improve talent mobility, entrepreneurship and skill building?

How can the high economic growth economies of ASEAN help to rebalance both the global and the regional overall economic outlook?

All these questions are still unanswered at the current stage. The AEC development has been criticised for being “too slow” and some observers have said that the issues that have been delayed were those of importance and could make or break the success of the bloc’s integration.

Lack of leadership is also an issue. The ASEAN chairmanship is a rotating position and a series of officials from the poorer, less developed ASEAN countries will be the chair of ASEAN over the next years which means that leadership will be inexperienced and possibly less interested in pushing ahead quickly with integration on all fronts.

Furthermore, ASEAN will suffer the departure of a strong leader as Surin Pitsuwan ends his term at the end of 2012 and will be succeeded by Deputy Foreign Minister Le Luong Minh of Vietnam, who indeed has experience on the international political stage, but also was a communist official in highest ranks in his country for decades.

Language barriers

There are also some seemingly minor issues that could distort the vision of a joint community of equal partners. For instance, better English speaking countries in ASEAN such as Singapore, Malaysia and the Philippines will have a distinctive advantage over countries like Thailand where English language capabilities of the population and even in business are very poor.

Thailand has not given enough attention to improving English skills throughout its education system and now is in a somewhat weaker position even to countries such as Vietnam which has given increased attention to this and also benefits from having a western alphabet that makes learning English in reading and writing easier than in Thailand.

It is very clear that the AEC is a work in progress. Some efforts will go faster and bear quicker fruit than others; others will face more challenges and may be implemented more slowly.

The 600-million population of the bloc and all its businesses need to adopt an international mindset, which gives them the appetite and ability to make cross-border investments and acquisitions. But this missing mindset, in particular, will be one of the greatest hurdles on the way.

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Reading Time: 5 minutes

For Surin Pitsuwan, ASEAN Secretary-General, the ASEAN Economic Community is “still on track”

With only a little more than three years to go, the ASEAN Economic Community is far from being a concrete concept. Though the ten-member bloc shows strong self-confidence with regard to its economic capabilities, the way of how to establish a single market and production base is still unclear, as is the procedure of how to streamline the countries’ competitive advantages.

Reading Time: 5 minutes

For Surin Pitsuwan, ASEAN Secretary-General, the ASEAN Economic Community is “still on track”

With only a little more than three years to go, the ASEAN Economic Community is far from being a concrete concept. Though the ten-member bloc shows strong self-confidence with regard to its economic capabilities, the way of how to establish a single market and production base is still unclear, as is the procedure of how to streamline the countries’ competitive advantages.

By Arno Maierbrugger

No wonder that concerns are building up the closer the date comes. This week, Surin Pitsuwan, Secretary-General of the Association of Southeast Asian Nations (ASEAN), said that the AEC is likely to be delayed by a year until the end of 2015 because some countries were not ready. The first tier of the bloc would therefore not start on January 1, 2015, as planned, but on December 31, 2015, as “a number of challenges need to be addressed, including bridging development gaps between member countries,” as Pitsuwan put it.

The ASEAN Economic Community (AEC) shall be the goal of regional economic integration of ten member states by 2015 and 2020, respectively. The AEC envisages a single market and production base, a highly competitive economic region, a region of equitable economic development and a region fully integrated into the global economy.

So much for the theory. ASEAN countries have good reason to combine their economic strengths, as the bloc currently is one of the best performing economic regions in the world.

However, the blueprint for the European Union set up in the 1950s had a similar goal: to bundle and concentrate individual and sovereign states in an economic powerhouse. The EU plan was highly sophisticated and well-wrought, nonetheless it didn’t work out. Today, the EU is on the brink of bursting apart, and for one major reason: The countries that have been tied together to a single economic zone with a joint currency were too different.

It turned out that, for example, Germany and Greece, Sweden and Spain, or France and Italy do not have that many things in common that would allow them to act in concert. Northern Europe states, with a population said to be predominantly diligent, hard-working and tax law-abiding, are contrary to Southern Europe, whose population is said to be more laid-back, roguish and casual.

And so it happened that while Germany and other rich northern states worked hard to develop the economic union further, Greece simply sent fictitious state budget reports to Brussels indicating that its economy is doing well within the strict regulations of the bloc.

This wasn’t true. The worst came when Greece had to declare itself bankrupt over its sugarcoated budget reports and did what it was expected to do: Holding out a tin up towards Brussels and cry for financial support.

What does this mean for ASEAN? It means that the architects of the AEC have to be very careful it their planning and learn from these mistakes. It is obvious that nations such as Singapore and Laos or Brunei and the Philippines are extremely diverse, with the economic and political rift being much deeper than between Germany and Greece, for instance.

One good step was it to split the creation date for the AEC. The union is scheduled to commence by 2015 for the founding members Indonesia, Malaysia, the Philippines, Singapore and Thailand. By 2020, Brunei, Cambodia, Myanmar, Laos and Vietnam are expected to join.

Seen from a best-case scenario, an AEC would seem to be a hugely positive initiative for the development of the ASEAN economies. However, this needs a common commitment by all member states to support the AEC. Yet there are some difficulties in realising it.

Many barriers have still to be dismantled. These include cumbersome customs procedures, diverse product standards and requirements and a lack of connectivity in cross-border transportation and telecommunications, which are far worse preconditions than for the European Union when it was established.

As such, ASEAN is also far from being a single production base in which manufacturing operations could be linked seamlessly across the region.

Moreover, during numerous meetings at government level in the past it turned out that not all of the ASEAN member countries are willing and able to move at the same pace, which has to do with very diverse political structures in the member states and with the big difference between high-, middle- and low-income economies within the bloc.

When the EU was established, all the joining members were free democracies that were asked to commit to the bloc via national referendums. In ASEAN, this is very unlikely to happen. The region consists of a mixture of democracies, two communist one-party states, a recently overturned military regime, an authoritarian city state and a sultanate far from being democratically ruled.

Open gaps

How can the monetary systems in the AEC be aligned? How can a country like Brunei, that has no central bank and has its interbank interest rates set amicably between the banks, obey to a new ASEAN Central Bank? Where should such a bank be located? How can a country like Myanmar be integrated into a joint currency or at least a currency band within the member nations’ currencies? Currently, the new monetary system of Myanmar is so volatile that the speculative injection of only a few $100 million could cause the system to burst and tear down the rest.

The structural differences among ASEAN members appear to create a reluctance to give up their national policies; for instance, in relation to the huge discrepancies between the member states in their average external tariff levels. Another example is the widely divergent stages in each member’s services sector. Hence, there exist wide development gaps within the bloc.

The next problem is that ASEAN member countries are very much dependent on external trade and thus are more competitive than complementary in structure. They are producing a narrow range of similar primary products and labour-intensive manufactured goods for export.

Other key questions are how leaders from ASEAN will better link the region’s transportation infrastructure, health systems and institutions to maximise convergence of people, goods, services and economic hubs?

How will governments and institutions develop the financial policies to manage inflation, capital outflows, commodity price volatility and balanced growth towards greater domestic and regional demand?

How will the region leverage its demographic dividend and technology base to develop models to increase growth through innovation, improve talent mobility, entrepreneurship and skill building?

How can the high economic growth economies of ASEAN help to rebalance both the global and the regional overall economic outlook?

All these questions are still unanswered at the current stage. The AEC development has been criticised for being “too slow” and some observers have said that the issues that have been delayed were those of importance and could make or break the success of the bloc’s integration.

Lack of leadership is also an issue. The ASEAN chairmanship is a rotating position and a series of officials from the poorer, less developed ASEAN countries will be the chair of ASEAN over the next years which means that leadership will be inexperienced and possibly less interested in pushing ahead quickly with integration on all fronts.

Furthermore, ASEAN will suffer the departure of a strong leader as Surin Pitsuwan ends his term at the end of 2012 and will be succeeded by Deputy Foreign Minister Le Luong Minh of Vietnam, who indeed has experience on the international political stage, but also was a communist official in highest ranks in his country for decades.

Language barriers

There are also some seemingly minor issues that could distort the vision of a joint community of equal partners. For instance, better English speaking countries in ASEAN such as Singapore, Malaysia and the Philippines will have a distinctive advantage over countries like Thailand where English language capabilities of the population and even in business are very poor.

Thailand has not given enough attention to improving English skills throughout its education system and now is in a somewhat weaker position even to countries such as Vietnam which has given increased attention to this and also benefits from having a western alphabet that makes learning English in reading and writing easier than in Thailand.

It is very clear that the AEC is a work in progress. Some efforts will go faster and bear quicker fruit than others; others will face more challenges and may be implemented more slowly.

The 600-million population of the bloc and all its businesses need to adopt an international mindset, which gives them the appetite and ability to make cross-border investments and acquisitions. But this missing mindset, in particular, will be one of the greatest hurdles on the way.

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