ASEAN integration: for some member-countries, it’s swim or sink

Core
Business World, 4 March 2015

The Association of Southeast Asian Nations (ASEAN) is determined to establish the ASEAN Economic Community (AEC) by Dec. 31 this year — ready or not. It is fully aware of the dangers that lurk ahead, that its member countries are at different stages of development. But like a mammoth ship that has embarked on a dramatic journey, the laggards among its members are the least of the association’s worry. For them it’s swim or sink.

The decision to establish the AEC by 2020 was first agreed upon by ASEAN leaders in its Oct. 7, 2003, meeting. After a series of meetings to develop blueprints with clear targets and timelines, the ASEAN leaders took the bold move and decided to accelerate the setting up of the AEC from the original target of 2020 to 2015.

The ASEAN leaders signed the blueprint of the AEC at their 13th summit in November 2007. During ASEAN’s last summit in Myanmar, they agreed to formally announce the establishment of the AEC by end December 2015.

The AEC aims to transform the region into a competitive and united player in the world economy.

The ASEAN, one of the fastest-growing regions in the world, consists of 10 countries at varying levels of development — from the richest Singapore to the poorest Myanmar. It offers a growing consumer market of 620 million. Its gross domestic product (GDP) is estimated at $2.3 trillion in 2012 and is expected to grow to $3.8 trillion by 2017.

In brief, as an economic bloc, ASEAN’s potential is enormous.

But make no illusion about it. No ASEAN leader or scholar expects ASEAN integration to be like the European Union. For one, there will be no single currency, given the different economies and the different fiscal systems.

Realistically, no ASEAN country would willingly surrender its fiscal and monetary sovereignty. Hence, from the start, the AEC appears to be an inferior agreement to the already widely discredited European Union.

Appearances can also be misleading. It would appear that ASEAN integration is ready. For one, during the last decade, tariff rates have gone down. But while zero tariff rates are a necessary condition for the ASEAN integration, it is not a sufficient one. There remain a lot of non-tariff barriers which could hinder the free flow of goods.

There is also the fear that foreign companies might be attracted to enter the ASEAN and they might crowd out local firms. This fear has to be addressed. Most of the firms in ASEAN countries like Indonesia, Myanmar, Cambodia and Laos are small and medium enterprises, and they employ over 90% of the workforce. That has to be a major concern for policymakers in labor surplus ASEAN economies.

As for the Philippines, its economic growth might accelerate due to a higher demand for local products in the ASEAN market.

The increased labor mobility in the ASEAN market might provide more job opportunities for Filipinos, which might help ease the serious unemployment at home and could further increase overseas workers remittances.

The Philippines has an advantage in the service sector because of its huge supply of English-speaking workers. At the same time, business firms might be attracted to locate in the Philippines because of the big pool of English-speaking labor supply.

Greater ASEAN integration will result in the easy adaptation of cutting-edge technology and best business practices, allowing local firms to adapt to international standards.

Realistically, ASEAN integration is not going to be a walk in the park. Philippine policymakers have to address some real problems. First, on the fiscal side, the government has to make the tax system in sync with the rest of the region.

Having the highest marginal personal income tax rates and one of the highest corporate income tax rates in the region is a major disincentive for local and foreign investors.

Second, the government has to address the Philippines’ notoriously poor infrastructure, the high cost of doing business, and poor governance. There has been some improvements, but the Philippines remains at the bottom of the ASEAN-5 ranking. It has to find ways of reducing the costs of power and, at the same time, making power supply more reliable.

Tourism has great potential. But in order to boost tourism, the country needs world-class airports, seaports, highways and urban transit system. It needs more hotels and facilities in select tourist destinations. In addition, the government has to ensure the safety of tourists on their way to and from the tourist destination and during their entire stay in the country.

Third, the government has to continue to invest in human capital — to make sure that the growing labor force is healthy and is equipped with the appropriate education, skills and training that will prepare them to compete with the rest of the global workforce. But given the social costs of overseas employment, the government should strive to create more high-paying, decent jobs at home.

Fourth, the government has to address the problems of the agriculture sector. Sadly, the sector is not ready for ASEAN integration. It is not competitive because of the limited arable land (thanks to land reform and the mountainous terrain) and the poor public infrastructure to transport agricultural products from the farm to the market.

The sugar industry cannot compete with Thailand while the rice industry cannot compete with Thailand and Cambodia. The mining sector is barely surviving, largely because of the lack of a clear mining policy.

To say that we’re ready for ASEAN economic integration is like whistling in the dark. ASEAN integration is not going to happen overnight, but the sooner our policymakers address our own limitations — and there are many — the better.