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Shift and Strategy: ASEAN’s Ambitious Plan for a New Economic Powerhouse

by Abby Larson on February 03, 2015

ASEAN-AEC

The Association of Southeast Asian Nations (ASEAN), a political and economic organization of ten Southeast Asian countries, is poised to make a major impact in 2015. However, despite the rapid growth in globalization over the last two decades, a survey showed that only 60 percent of international businesses are aware of ASEAN’s upcoming ASEAN Economic Community (AEC) initiative. Promising to create a unified market between the ten ASEAN countries, the AEC has the potential to solidify Southeast Asia as a major player in the global economy.

ASEAN, formed in 1967, includes the countries of Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar and Vietnam. A combined 620 million people live in ASEAN countries, and taken together the group would comprise the world’s seventh-largest economy. Strategically located at the intersection of China, Japan and India, ASEAN’s international trade has tripled over the last decade, flush with foreign-direct investments and a quickly-growing middle class. Functioning in a similar fashion to the European Union, for decades ASEAN has worked to encourage peace, growth, and prosperity to its member nations. With the long-anticipated AEC integration on the horizon, ASEAN’s ambitious vision might finally become a reality.

Understanding AEC: The ASEAN Economic Community

The AEC plan would essentially unify all ten ASEAN countries into one dynamic open market. Removing barriers to the movement of goods, services, capital, and people throughout the region could enable the bloc to capture a larger share of global manufacturing in light of rising wages in China. Becoming a unified production base could help ASEAN gain anywhere from $280 to $625 billion in annual GDP by 2030. Since exporting will be up to 20 percent more efficient and less costly, local companies would be able to expand beyond their home markets, opening up a wider range of goods and services to millions of new consumers.

Another objective under the AEC is the development of a deep, liquid, and integrated capital market to enable freer flow of capital across the region. A trading link between ASEAN countries, providing investors easier access into the region’s market, could raise the profile of the bloc as an asset class and attract greater international investment into the region. Though still in a transition process, the AEC has already sparked increased interest from abroad. For example, Japanese investors are increasing their presence in Southeast Asia looking to strike trade deals with Cambodia and Laos. These countries are both major targets of Chinese investment as well, and observers see a greater increase of competition over the next few years as the major economic powers attempt to profit from AEC integration.

Laos and Cambodia, presently two of ASEAN’s least developed countries, stand to greatly benefit from AEC integration. Laos, which borders five other countries, is developing into a major transportation hub. While Cambodia may be ASEAN’s poorest country on a per-capita basis, its government has committed to deregulation and making things easier for foreign businesses and investors who work with the country. One of the world’s fastest growing markets, Cambodia hasn’t had a single year of negative GDP growth since the mid-1990s.

Roadblocks and Results

ASEAN and the EAC face a few crucial challenges on the way to full integration. The ten member countries are vastly different with respect to their culture, history, economies, and governance. In Indonesia, which contributes roughly 40 percent of the ASEAN’s $2.1 trillion economy, many smaller and medium-sized businesses are concerned about a potential increase in cost of trade logistics. Thailand, another country expecting fast economic growth and business expansion under the AEC, is attempting to modernize their regulations and invest in infrastructure to support businesses and encourage foreign investors. ASEAN’s lower-income countries, where the average labor productivity remains about 40 percent lower than in China, must also focus on modernization. Countries like Cambodia and Vietnam will need to upgrade their equipment, processes, and workforces’ skills to compete in the global manufacturing market.

While the developing economies of ASEAN are concerned that they’ll be lost in the shuffle among the more powerful members, this is not necessarily the case. By focusing on trade, the AEC is using its diversity as an advantage. Companies will seek the benefits of cost-effective labor in some countries and more sophisticated manufacturing capabilities in others, limiting the potential for intra-ASEAN competition. Much like Mexico under the North American Free Trade Agreement, the lower-income economies of ASEAN stand to greatly benefit from deep integration and place them on a more even footing with their wealthier neighbors. Once implemented, the AEC could generate 14 million additional jobs and double productivity in some ASEAN economies.

AEC has been in the works for decades, and after numerous delays ASEAN leadership have set a December 31, 2015 deadline for full integration. It’s an ambitious timeline, and one which may not be entirely realistic. Still, a united, more powerful Southeast Asian economic community is worth the wait—and for companies who do business with the region or are seeking to do so, having a more consolidated market will likely make the process easier, particularly when challenges like credit decisions or account recovery inevitably arise.

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