ISSN 2330-717X

ASEAN Economic Community: An Appraisal

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The 10-member Association of Southeast Asian Nations (ASEAN) has been one of the most successful regional groupings in Asia. Formed as an organization on 8 August 1967 in Bangkok as a five-member organization with the aim to accelerate economic growth, social progress and socio-cultural evolution among its members, it has assumed over the years other important role to address the region’s security issues so that peace and stability in the region is protected. The organization grew further when Brunei Darussalam became its sixth member on 7 January 1984, barely a week after gaining independence. It further expanded when it embraced Vietnam on 28 July 1995 as the organisation’s seventh member. Subsequently, Laos and Myanmar too joined two years later on 23 July 1997 as eighth and ninth members. The last country in the region, Cambodia’s entry into the grouping was delayed owing to internal political struggle when it joined the organization as its tenth member on 30 April 1999.

During the summit meeting in Kuala Lumpur in November, the leaders took an important step towards greater economic integration by deciding to form an ASEAN Economic Community (AEC), much like the European Economic Community. The Kuala Lumpur declaration envisages the community to come into being on 31 December 2015. The AEC, as part of a larger ASEAN Community aims for political, security, cultural and social integration. “Our ASEAN way has guided us and will continue to be our compass as we seek to realize a politically cohesive, economically integrated, socially responsible and a truly people-oriented, people-centered rules-based ASEAN,” observed summit host, Malaysian Prime Minister Najib Razak, at the signing ceremony. He hailed the AEC as a “landmark achievement”, and urged members to accelerate integration, observing that the “region is primed to expand exponentially”.

The importance of the ASEAN can be gauged from the fact that it covers a land area of 4.4 million square kilometers, 3 % of the total area of the Earth. ASEAN territorial waters cover an area about three times larger than its land counterpart. The member countries have a combined population of approximately 625 million people, 8.8% of the world’s population. In 2015, the organisation’s combined nominal GDP had grown to more than $2.6 trillion. When ASEAN becomes a single entity on 31 December 2015, it would rank as the seventh largest economy in the world, behind the US, China, Japan, Germany, France and the United Kingdom.

The idea of creating an AEC was mooted 13 years ago. Now by creating a unified economic community in a region more populous and diverse than the European Union or North America, the AEC hopes to compete with China and India. As of now many tariff barriers have already been eliminated among ASEAN states although many politically sensitive sectors such as agriculture, auto production and steel remain protected. The AEC is expected to facilitate freer movements and removal of barriers that hinder growth and investment.

However, much work remains to be done, particularly achieving the primary goal of allowing freer movement of skilled workers, trade and capital for the region’s more than 600 million people. So, the AEC is just a start. Integrating ASEAN economies, intended to help the region compete with giants such as China and India, would create the world’s seventh-largest single market. The real challenge stems from the fact that compared to the European Union, the AEC is culturally and politically more diverse with various systems of government including communism (Laos and Vietnam), a military junta (Thailand), authoritarian (Cambodia), quasi-civilian (Myanmar) and a monarchy (Brunei).

The most worrying fact that could come on the way of reaping the benefit from the AEC is corruption, which is endemic and could hamper the economic integration process. The member nations ought to work towards more transparency and accountability, which work as impediments to development. Notwithstanding the initial birth pangs that an AEC might face, it is likely soon to transpire that one can expect much more than rhetoric when the day of 31 December 2015 dawns. There are voices such as that by the ASEAN Civil Society Conference and ASEAN Peoples’ Forum which complain that the implementation of the AEC will excessively benefit corporate interests, not the majority of the region’s population. These skeptics say that as “ASEAN moves towards regional economic integration, unequal and unsustainable economic growth will result in worsening poverty, inequalities of wealth, resources, power and opportunities between countries, between the rich and the poor and between men and women”.

As of now, many of its fundamentals have been applied in the region such as removal of tariff barriers and visa restrictions among others. It has also led to greater political and cultural cooperation. Much against what skeptics say, AEC is expected “bolster income and employment, and provide the region with stronger economic muscle in facing the other giants”. As individual countries, the ASEAN nations may be small to be “important players in the economic and security game, but as an integrated group of more than half a billion people, they would be in the major league”. This optimism does not discount the fact that the region is diverse with different languages, following different faiths and governed by various systems, including rambunctious democracies, a military dictatorship, quasi-civilian, authoritarian, monarchy and communism, all of which may be impediments. However, having resolved on the ambitious plans, the AEC needs to be seen with a sense of optimism to foster greater economic integration in the region and beyond.

As said, opening up agriculture, steel, auto production and other protected sectors would be challenging. However, citizens of the ASEAN member countries would be free to move and work in any country of the grouping, though engineering, accountancy and tourism would be attractive. It is to be seen if host countries would still put up constitutional regulatory hurdles restricting the inflow of talent. As regards intra-regional trade, it has remained at around 24 per cent of ASEAN’s total global trade for the last decade, lower than 60 per cent in the European Union.

There have been occasional diplomatic flare-ups among some of the member nations. While Cambodia and Vietnam have border disputes, Indonesia has been unable to fight annual forest fires that spew haze for months over Malaysia, Singapore and Thailand. Cambodia, Laos, Myanmar and Vietnam are still catching up with other member states. In the process of economic integration, income inequalities are feared to widen. The gulf divides between rich and middle income economies and less developed members are unlikely to be bridged soon. That would remain a challenge for the AEC. The AEC is one of the three pillars of the ASEAN Community, the other two being political-security and socio-cultural. These differences did not deter Vietnam and the Philippines to forge a strategic partnership between Vietnam and the Philippines, for which China was the driver, raising hopes for dialogue in preference to coercion to resolve dispute.

The main aim of the AEC is to have a single market with free flow of goods, capital and skilled labour across national borders. What is significant is that there shall be a common policy and actions on environmental, social and cultural issues and in fighting terrorism and drug trafficking. Notwithstanding the commonalities, if the member nations want to leverage the social diversity as strength, they ought to handle the differences in a spirit of cordiality and mutual respect.

The new version of the EC may not lead to a ‘big bang’ moment in terms of economic integration soon as envisaged because of diversities among member states. Though tariff barriers are virtually eliminated, freer movements and removal of barriers that hinder growth and investment are the next logical steps.

What does the creation of the AEC mean for India? The AEC can leverage India’s emerging economic strength in the interest of region’s economic prosperity. Prime Minister Narendra Modi was present, seated next to his Chinese counterpart Li Keqiang, when the declaration to form the community was signed. He promised to make India as an important economic partner. The AEC would act as a facilitator to Modi’s Act East policy, a new frontier to invigorate its foreign and foreign economic strategy.

India has civilizational linkages with the members of the ASEAN grouping. It has some 30 dialogue mechanisms, which includes a summit and seven ministerial groups and covers foreign affairs, commerce, telecommunications, tourism, agriculture, environment and renewable energy. The core of the ASEAN-India partnership is economic. The grouping is India’s fourth largest trading partner. India, in turn, is the sixth largest trading partner for ASEAN. Trade between the two sides amounted to $76.52 billion in 2014-15, with India’s exports worth $31.8 billion and imports $44.7 billion. Currently, India is negotiating a Regional Comprehensive Economic Partnership (RCEP) with the ASEAN nations and the grouping’s FTA partners. There had been some breakthroughs in the negotiations and the agreement is likely to be concluded in 2016.

A recent report in Hindustan Times succinctly mentioned about the human connects in India-ASEAN relations. More than five million citizens of the ASEAN nations trace their roots to India. Malaysia alone is home to two million people of Indian origin and some 130,000 expatriates. Indeed, the ASEAN-India Strategic Partnership had gained momentum after Prime Minister Modi unveiled his “Act East” policy at the last ASEAN-India Summit in Myanmar in November 2014. India and ASEAN are also working jointly to address non-traditional security threats such as terrorism, human and drug trafficking, cyber crimes and piracy in the Malacca Straits.

The new AEC could give India greater market access in the ASEAN region. The grouping has a huge middle-class market and Indian industries and services can address to their demands and expectations.

The report further mentions that investment flows between ASEAN and India too are growing. Between April 2007 and March 2015, India invested $38.6 billion in ASEAN while the grouping invested $32.4 billion in India. The economic integration process got a boost with the creation of the ASEAN-India Free Trade Area in July 2015. While in Kuala Lumpur, Modi highlighted the need for greater connectivity, both physical and digital. He also unveiled a $1 billion line of credit to boost projects that enhance connectivity with the grouping.

The AEC will take some more time to become fully functional even after becoming a legal entity on December 31. Politically sensitive areas such as opening up agriculture, steel, automobile production and other protected sectors remain to be resolved. But the prospects are promising.

Dr. Rajaram Panda

Dr. Rajaram Panda

Dr. Rajaram Panda, Lok Sabha Research Fellow, and Member Governing Council, ICWA Former ICCR India Chair Professor, Reitaku University, Japan, and former Senior Fellow, IDSA, New Delhi E-mail: [email protected]

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