ASEAN's Next Level

Estimated reading time: 2 minutes

Economic growth in ASEAN – the Association of Southeast Asian Nations – has slowed since the global financial crisis, with commodity prices down and liquidity starting to tighten. However, the launch of the ASEAN Economic Community (AEC) by the 10 ASEAN countries will establish a single market and production base whose potential is immense.

Politicians set a deadline of 31 December 2015 for agreeing the AEC, but that should be seen as a milestone rather than an end. Indeed, key features such as the free flow of skilled labour and investment may not be fully realised for years. Even so, the economic community could increase the region’s GDP by 5 per cent by 2030.

The ASEAN countries’ combined GDP totals USD2.5 trillion (slightly below the UK’s, but larger than India’s). Their share of global GDP is only 3.2 per cent, compared with its 8.7 per cent share of the world’s population. But ASEAN’s GDP has quadrupled since 2000 in dollar terms, thanks to domestic reforms, good demographics, liquidity inflows and trade liberalisation.

The ASEAN Free-Trade Agreement, established in 1993, is the foundation of all subsequent economic integration, culminating in the AEC.

Trade integration helped the region attract investment, particularly into the electronics and car industries. Nonetheless, ASEAN’s record in trade liberalisation has fallen short of international best practice. Some ASEAN members have excluded certain industries from free trade agreements, keeping tariffs on sectors such as agriculture, for example. Bureaucracy, health and safety or language requirements have impeded free trade in both goods and services.

The AEC agreement is the region’s way to raise its competiveness and facilitate investment, particularly between countries with large gaps in per-capita income and labour costs.

It is supported by four pillars: a single market and production base; a highly-competitive economic region; an area of equitable economic development; and a region fully integrated into the global economy.

Free trade in goods has already been largely achieved but services liberalisation is ongoing and far from perfect. This must be rectified for increased integration to work. The AEC should now aim to free flows of capital and investment.

Another key part of the economic community is the ASEAN Banking Integration Framework, which is expected to be realised only in 2020. Any ASEAN-based bank will be re-classified as a local bank across the 10 economies, rather than as a foreign bank.

The AEC blueprint also envisages a free flow of skilled labour but this is unlikely to happen in the near future.

Ultimately, our analysis shows that a pick-up in services trade and investment will provide the biggest boost to ASEAN. We think that, with the implementation of the AEC, the region’s GDP will be 5 per cent higher by 2030. On an individual country basis, Singapore, Malaysia and Thailand should benefit most from the AEC by that date in terms of GDP.