Friday, May 9, 2014

Report card on Asean economic integration

May 08, 2014

S.E.A. VIEW


By Razeen Sally For The Straits Times

IS ASEAN'S economic integration encouraging the region to become a more distinctive collective entity in the global economy? The answer is yes, although with important reservations.

South-east Asia is an area of extreme economic diversity. The gap in living standards between the richest and poorest countries (Singapore and Myanmar respectively) is 40 to 1. But this is only one dimension.

Singapore is a services-based economy; Brunei is oil-based; Malaysia and Thailand are fast industrialisers; Thailand and Vietnam are big agricultural exporters; Indonesia and the Philippines are net food importers; and Cambodia, Laos and Myanmar are still agrarian societies.

Government economic policies also vary widely. Singapore is a free port in which the total value of trade is equal to 400 per cent of gross domestic product. At the other extreme, Myanmar has only recently started to open up its borders. The value of trade in the latter is equal to only 31 per cent of GDP.

Then there are huge gaps in the quality of regulation, institutions and the business climate. According to the World Bank, Singapore ranks first in the world for "ease of doing business"; Malaysia and Thailand are in the top 20; but the others are way behind.

Compounding such economic diversity are wide differences in history, culture, geography, population, population density and - not least - political systems.

Nevertheless, there are also increasingly important elements of convergence across Asean countries.

Integration with the global economy stands out: Since the 1980s, all Asean countries have liberalised trade and foreign direct investment.

Average import-weighted tariffs are around 5 per cent for most Asean countries. And all except Indonesia, Philippines, Laos and Myanmar have trade-to-GDP ratios of about 100 per cent or higher.

Asean has also become a regional production hub for parts and components in global manufacturing supply chains. This has knitted Asean and North-east Asia - including China - together in ever-tighter trade and production linkages.

Now turn to the regional economic outlook. The International Monetary Fund forecasts growth at 5 per cent this year for the Asean-5, which consists of the Philippines, Indonesia, Malaysia, Thailand and Vietnam - a figure that is in line with growth in the last few years.

A slightly stronger recovery in advanced economies, particularly in the United States, should also give a marginal boost to Asean's growth through exports.

Challenges ahead

BUT there are storm clouds ahead. First, a slowdown in China's growth has implications for Asean's exports of intermediate products in global supply chains, its exports destined for the Chinese domestic market, and Chinese investments in Asean.

Second, Asean countries have seen a credit explosion as a result of loose monetary policies at home and around the world. Consumer debt has piled up. Asset and property bubbles are getting bigger.

Tighter global monetary conditions, especially with "tapering" by the US Federal Reserve and the likelihood of higher interest rates in the West, increase the risk of a mini-crash.

Governments will have to bite the political bullet and wean themselves off loose-money policies sooner rather than later.

That said, Asean countries are in a much better position to weather global shocks than they were during the Asian financial crisis in 1997.

Fiscal and monetary conditions are better, exchange rates are more flexible, there is much less exposure to short-term foreign debt, and bond markets are deeper.

Third, a decade of cheap-money policies and high commodity prices has engendered lazy complacency in emerging markets. Asean is no exception.

Governments have neglected structural reforms to reduce market distortions. These are now more visible with tighter global monetary conditions and falling commodity prices.

Large swathes of markets for land, labour and capital remain unreformed. That is also true of much of the public sector. The liberalisation of international trade and investment has slowed down or stalled.

Government red tape plagues the business climate.

The World Bank's Doing Business Index has Vietnam in 99th place, Myanmar bringing up the rear in 182nd place, with Philippines, Indonesia, Cambodia and Laos in between.

New opportunities

MOST Asean countries need fresh structural reforms not only to cope better with external shocks, but also to take advantage of emerging trends in global supply chains. Multinationals are looking for new investment destinations as China becomes more expensive.

If South Asia - India in particular - opens up more to global markets, labour-intensive, export-oriented manufacturing will migrate there.

That will present huge opportunities for Asean countries in the middle of pan-Asian regional production networks, halfway between China and India.

Genuine Asean economic integration - the free flow of goods, services, capital and people within the region - would deliver huge gains, not least from deeper integration into global supply chains. That is the logic of the Asean Economic Community (AEC).

The bulk of intra-regional tariffs have been abolished. Partial progress has been achieved on simplifying and harmonising Customs procedures, cross-border infrastructure projects, and opening up Asean skies to low-cost airlines. A few sub-regional integration initiatives have made headway, notably the Greater Mekong Sub-Region and Iskandar-Singapore.

Asean Economic Community

BUT, overall, the AEC is well behind its targets to reduce and abolish non-tariff and regulatory barriers in goods, services and investment.

Most restrictions to intra-regional commerce lie here, not in tariffs and quotas "at the border". Moreover, Asean's monetary and financial integration is even weaker than it is in trade and investment, so far restricted to modest measures like the Chiang Mai Initiative.

Incremental progress, not a utopian leap to European Union-style top-down, institution-heavy integration, is probably the best Asean can expect, given the political realities.

South-east Asia has made substantial economic progress because its governments have liberalised markets, thereby enabling integration into global supply chains.

Now a second generation of market reforms is needed to cope with external shocks and to take advantage of new regional and global opportunities.

Asean's collective efforts can at best be a helpful auxiliary, but success is mainly a matter of unilateral action by governments individually. Should these politically challenging reforms be implemented, Asean will become an even more distinctive and prosperous collective entity in the global economy.


The author is visiting associate professor at the Lee Kuan Yew School of Public Policy, National University of Singapore.

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