ASEAN integration: one step forward, two steps back

Going by its "roadmap", ASEAN will by 2015 become an economic community with a US$2 trillion combined market and become a magnet for integration across the whole of East Asia, the world's most dynamic region.

This concept of an ASEAN Economic Community (AEC) was mooted in 1997 - at the height of the Asian financial crisis.

In their bid to keep ASEAN relevant amid the rise of China and India, the region's leaders sought to build the AEC on four planks - a single market and production base; a competitive community; an area of equitable economic development; and a region integrated into the global economy.

Fifteen years on and less than three years away from the 2015 target, however, there is some cause for concern.

Emeritus Senior Minister Goh Chok Tong, speaking at a recent ASEAN conference organised by the Singapore Institute of International Affairs (SIIA), summed up the zeitgeist: to keep the region plugged into the global economy, ASEAN needs to pursue its economic integration "relentlessly", he said, adding that the bloc will need to work on two issues - liberalising the services sector across the region, and non-tariff barriers.

Therein lies the rub. ASEAN officials regularly tout that - according to a "scorecard" studying the progress of the AEC - 66 per cent of measures to achieve a single market and production base have been implemented. That figure, however, represents low-hanging fruit, such as the removal of tariffs.

While the original ASEAN six - Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand - boast that 99.65 per cent of tariff lines across the region have been removed, the fact is, non-tariff barriers (NTBs) continue to impede business.

In Malaysia, NTBs can be found in the automotive, oil and gas sectors. In Indonesia there are restrictions on beef imports.

In addition to restrictions on the free flow of goods, freedom of workers' movements is another issue holding up the AEC, says Ms Sanchita Basu Das, a lead economic researcher at the Institute of Southeast Asian Studies and the editor of "Achieving The ASEAN Economic Community 2015", a collection of essays studying the AEC's implementation.

In Thailand, for example, the Alien Employment Act prohibits foreigners from being employed in professions such as civil engineering and legal services.

Says Ms Basu Das: "If you say you have the free movement of labour but have restrictions, you cannot say you enjoy such free movement of labour."

In terms of enhancing physical connectivity, ASEAN has come some way. In 2010, it tabled a Connectivity Masterplan to enhance physical and people-to-people links.

But the enabling ASEAN Infrastructure Fund has initial equity of only $485 million. It has been estimated that ASEAN will need to spend $60 billion a year on infrastructure.

"ASEAN has a lot of connectivity initiatives, but a number of them are impeded by structural weaknesses, low responsiveness to users, organisational inefficiencies, insufficient funding and heavy dependence on overseas development aid," says Pushpanathan Sundram, the managing director of EAS Strategic Advice, a consultancy. He was formerly an ASEAN deputy secretary-general.

More importantly, the members of ASEAN at its current stage of development face the same dilemma that other regional bodies such as the European Union have faced - the surrender of more sovereignty to a regional organisation. Put differently, many ASEAN countries struggle with whether to put ASEAN's interests above their own national interests.

A classic example is that of gas pipelines in Thailand and Malaysia, which are held by monopolies. This would hinder the formation of trans-ASEAN gas pipelines.

"For integration to move ahead, we really need a change in mindsets. ASEAN countries have to think regional and act national to implement locally the grouping's regional economic commitments," says Pushpanathan.

This is not to say that all is lost for the AEC. ASEAN, unlike the EU, started out more as a political body than an economic one. The EU started out as an economic body focused on coal and steel, and then took on political dimensions later. As a result, expectations about the AEC should be moderated.

Moreover, the fact that ASEAN remains externally oriented bodes well. During the Cold War, the bloc sought to avoid being used as a geopolitical pawn by the superpowers, leading to perceptions of a "fortress ASEAN". Today, however, it has sought to be part of the great geopolitical game in Asia, seeking to draw in great powers like China and the US. It has made itself relevant by signing free trade agreements with countries such as Australia and China.

More importantly, ASEAN will not lose out to China in the foreign direct investment stakes if the AEC leverages on the fact that the grouping is made up of countries at different levels of development.

Gautam Banerjee, the executive chairman of PricewaterhouseCoopers Singapore, says ASEAN can entice potential investors by getting them to locate "softer" functions such as logistics, treasury and supply chain management in its more advanced countries, say, Singapore, and get "heavy lifting" manufacturing operations done in Malaysia, Thailand and Indonesia.

"If we can ignite some of this thinking … ASEAN can be a credible challenge to China," said Banerjee at the SIIA conference.

To an extent, this is already happening. The Hong Kong Economic and Trade Office says some Hong Kong firms have decided to invest in ASEAN countries rather than mainland China.

There is a combination of push and pull factors, a spokesman adds. In China, labour costs have risen due to the strengthening yuan. In addition, ASEAN's recent strong economic performance and low labour costs have made the region attractive.

Looking ahead, ASEAN's economic prospects would be much enhanced if the private sector - rather than the bureaucrats - took the lead.

However, the entire AEC enterprise is still very much a top-down endeavour and ASEAN watchers say it receives relatively little input from businessmen, the very people who should be spearheading integration.

The experiences of Thai companies are indicative. According to a survey by the University of the Thai Chamber of Commerce, only 11 per cent of firms polled said they understood what the AEC is about. The rest said they had no idea.

No wonder then that the utilisation of the ASEAN Free Trade Area by ASEAN firms stood at only 23 per cent in 2008.

Granted, a group of business leaders - including the chiefs of CIMB Bank, AirAsia and Ayala Group - has launched the ASEAN Business Club, a private-sector initiative to engage in ASEAN integration. But ASEAN still has its work cut out for it.

"ASEAN businessmen have let their bureaucrats run away with whatever they want to do. They need to speak up for themselves," says Dr Suthad Setboonsarng, senior adviser at BowerGroupAsia, a business advisory firm.

"If it wants ASEAN to be effective, the private sector has to guide governments. So don't complain about ASEAN not working, if the private sector is not working."

ASEAN has been in the news recently for failing to come up with a communique amid differences over its handling of the contentious South China Sea issue, which involves China and ASEAN member states such as Vietnam and the Philippines. The South China Sea issue is important, but it will be a political issue that will continue to test ASEAN's leadership and coherence for years to come.

In the meantime, however, effective economic integration - the bread and butter of ASEAN's existence - should deliver the goods that will make ASEAN relevant.

William Choong