August 3, 2017 10:00 am JST
ASEAN AT 50: Munir Majid

ASEAN integration lags the real world

China's rise and the digital economy are absent from the group's plans

ASEAN leaders pose for a photo at the signing ceremony of the ASEAN Economic Community in Kuala Lumpur on Nov. 22, 2015.

Any objective verdict on the achievements of the Association of Southeast Asian Nations in the last 50 years can only be mixed. Governments and public officials will say the glass is half full in assessing the organization, while non-governmental organizations and the private sector will declare it as half empty. Going forward, ASEAN has optimistic plans for further integration until 2025. The results could determine which view is right.

From the business perspective, what is more important than ASEAN's contribution to peace and stability is what is built upon it. This depends on if outcomes are optimized. Government officials would appear to be satisfied with ASEAN pursuing sub-optimal goals as long as the group survives. Businesses want ASEAN to thrive by achieving optimal results

Consider the ASEAN Economic Community. Officials talk about the potential great size of the ASEAN economy based on conditions for growth that look unlikely to be fulfilled. This implies that officials would be happy with any level of economic growth even if it falls short of their forecasts. They should therefore not play up hopes that could turn out to be false about ASEAN becoming the world's fourth largest economy in the world by 2050.

Businesses point out that ASEAN has so far failed to become a fully functioning single market and production base because some tariffs continue to exist and new non-tariff barriers have appeared even after the establishment of the AEC was announced in 2015, which affects the cost of intra-regional trade.

For example, ASEAN bases its economic growth forecast through 2025 on several assumptions: tariffs will be zero (possible), the cost of intra-regional trade will be reduced by 20% (improbable), and non-tariff barriers will be reduced by half (unlikely). On the contrary, since the AEC was announced, there have been many instances of the reverse. Certificates of origin have been rejected, trade in some halal products have been held up, and other conditions of doing business within the region have not improved as expected.

There are many complaints about rules and regulations that continue to hinder investment, prevent services being delivered to those that need them, and curb the movement of skilled labor despite the signing of mutual recognition agreements, such as those pertaining to engineers.

ASEAN's consensual approach of not rocking the boat delays progress despite the frantic pace of working groups meeting to propose solutions. The pace of economic integration is insufficient in meeting not only ASEAN's own goals but the ability of the region to meet future global challenges.

China syndrome

ASEAN has not adequately taken into account the rise of China in its integration plans, which could undermine its assumption of regional cohesion. China's trade and investment with Southeast Asia is often expressed in aggregated amounts. But this fails to convey the fact that China's relations with ASEAN member countries are primarily conducted in a bilateral manner, with some sub-regional consequences.

In the sub-region of Cambodia, Laos, Myanmar, Vietnam, and Thailand, economic ties with the southern Chinese provinces of Yunnan and Guangxi are strong. Together, they form a distinct economic area of 400 million people with an economy about half the size of the ASEAN. It is also growing by 7%-8% a year, well above the ASEAN average of about 5%.

This sub-region is likely to continue to prosper as a result of Thailand's ambitious plan to develop its eastern economic corridor, increased connections with Kunming in China, and expansion of east-west transportation routes from Mawlamyine in Myanmar to Danang in Vietnam. This leaves ASEAN as a secondary story, with the sub-region having little need for ASEAN economic integration guidelines.

While such sub-regional developments are not extraordinary, what is new is the central role being played by China, which is becoming the most powerful country in east Asia, if not the world.

China's Belt and Road Initiative is not empty rhetoric. The transportation connections and logistics networks it will establish are likely to change trade flows and volume within Southeast Asia. For example, China has raised the possibility of helping to build the long-discussed Kra canal across the Thai isthmus of the same name. This will allow ships to bypass the Strait of Malacca, which would reduce port business for Singapore and affect its distribution network.
 
ASEAN has to face up to these developments and possibilities and redraw its economic integration plan to accommodate them. Its gradual economic integration process cannot meet the dynamic expectations of business, which wants fast results.

The digitization of the economy is proceeding at a rapid rate, but the 2025 master plan only addresses this trend on a piecemeal basis. The rise of automation, which threatens unskilled and semi-skilled employment, is not addressed at all. The best way to meet this challenge is developing new paradigms in education and job training, but this is left up to the individual ASEAN countries to determine.

The economic divide

Digitalization also threatens to widen the disparities among Southeast Asian countries. Automation could end the use of low-cost labor in manufacturing on which the poorest ASEAN survive, while countries attuned to the potential of the digital economy will likely grow richer because of greater productivity and the creation of higher value-added industries.

Chinese companies are beginning to dominate the digital space in ASEAN economies, which could prevent Southeast Asia's own technology companies from taking full advantage of the fourth industrial revolution.

These are all very real developments for the near future that ASEAN is failing to address. Even with its less dynamic model of integration, ASEAN is struggling to keep pace. The group needs a radical overhaul in thinking and leadership if ASEAN is to remain the most relevant model for closer economic integration in the future - a future that is already happening now.

Munir Majid, a visiting senior fellow at LSE Ideas, Centre for International Affairs, Diplomacy and Strategy, is chairman of the CIMB ASEAN Research Institute, president of the ASEAN Business Club and chairman of Bank Muamalat Malaysia.

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