Recently, the world has experienced financial crisis, those countries that have been powerful and have strong economies such as the members of European Union (EU) such as the United Kingdom, France and Greece, are facing a big financial collapse. So now a new economic community is arising with intense competition because new markets are developing and financial opportunities are sought. Association of South East Asian Nations (ASEAN) is one of significant players in the world’s economy for centuries. It has emerged strongly from the financial crisis offering the new opportunities for investors and businesspeople. The interest and attention of investment are moving to the ASEAN area more and more each year because of the available untapped market in the ASEAN and the potential of being the production base that eases and facilitates those new incoming traders and investors.
Many investors have kept their eyes on the region’s performance and its transition into the ASEAN Economic Community (AEC) which is the newest area of economic integration in the world. To study this economic bloc is significant in order to capture the great opportunities and prepare to be ready in taking the supreme advantages from the AEC. In the transforming processes, some practices will be applied to the members and that can make the difference between failure and success of the AEC project apparent. This could lead to a modification of the plan for AEC integration in the future, from the beginning of origin point to the change of community which takes place in four phases, its visions and four pillars. They should be taken into consideration to learn how it works to move forward because this economic community will possibly be the new engine of the world economy.
This essay consists of an introduction, explanation and clarification on the ASEAN and the AEC. In order to critically examine the AEC; most of its dimensions will be discussed. There are three areas included in the paper which are, firstly; identify and describe both communities’ purposes of existing as well as the characteristics of the community, these explanations can be used to explain and clarify what the AEC represents in the past, present, and future. The detail of each four-pillar, the core targets of the AEC, will be carefully interpreted. Secondly; the benefits of the AEC will be briefly examined. And lastly, the challenges that the AEC may face in the progression of it transformation from ASEAN will be analysed. Some suggestion will be offered in the conclusion.
What are ASEAN and AEC?
Association of Southeast Asian Nations (ASEAN) was established on 8 August 1967 in Bangkok, Thailand. The founding members are Indonesia, Malaysia, Philippines, Singapore, and Thailand. After that Brunei Darussalam, Viet Nam, Lao PDR and Myanmar, and Cambodia joined in 1984, 1995, 1997, and 1999, respectively. At the beginning, “it was for political purposes and was declared a preferential trade area in 1977.” (Frankel and Wei, 1997, p.312) that is the point where the ASEAN started moving towards the economic community and move further in 1992 when the ASEAN Free Trade Area (AFTA) was established.
Source: International Monetary Fund, 1994, World Economic Outlook, October 1994: A Survey by the Staff (Washington) Its performances have been outstanding. Apparently from many measurements, for example, the increasing of ASEAN’s Gross Domestic Product (GDP), the indicator that used to calculate health of the areas’ economy, compares to other countries’ is remarkable. In figure 1, from 1960-70, its Real GDP was 5.6. It has gradually increased and in 1990-2000, the real GDP was 7.6 which comparable with Republic of Korea, slightly lower than China and even higher than Japan that was at 2.5 (Larsen F., & Aziz J., 1997, p.309).
The Real GDP Growth of the ASEAN-6 (Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Vietnam) is forecasted to reach 6.0% on average from 2011-2015 while the EU’s real GDP growth before 2015 will not be more than 3% (The Conference Board, 2012). Additionally, the inflation has remained stable which reflects the notable performance of the ASEAN in setting fiscal and financial policies. Furthermore, the Foreign Direct Investment (FDI) inflows that was unattractive in the past, now it has distinguished among the world FDI inflows. As of 1995-2005, the FDI inflows of the ASEAN was about US$15,773 to US$38,083 million (ASEAN FDI Database, 2006, p.13) but after that it has been rocketed to US$47,075.6, US$ 38,266 and US$76,207 million in 2008-2010, respectively.(ASEAN Foreign Direct Investment Statistics Database, 2012, p.1)
Part One: Purposes of Establishing AEC
The main purpose of the establishment of ASEAN was cooperation in many areas such as economic, social, and etc. that promotes the regional peace and stability. (Economic Community Factbook , 2011, p.viii) Even though, there are many changes in the framework of improvement in the ASEAN, the shared vision “outward looking, living in peace, stability and prosperity, bonded together in partnership in dynamic development and in a community of caring societies”(ibid., p.viii) is maintained and used as fundamental outline in the future for every ASEAN nations. In 2003, all ASEAN members decided to create the more committed and strong economic community which is called “AEC”; they targeted to reach the plan by 2020. But then in 2007, they have changed to accelerate the established to 2015. The understanding on core four-pillar of the AEC can acknowledge the main purposes of the AEC and build an awareness on how the opportunities will be occurred in the region.
Regard to the four-pillar (ASEAN Secretariat, 2012, p.3-14), first is ‘Single Market and Production Base’, the ASEAN attempts to bring 10 nations to become one market and a key production base of the world by executing “Five Free Flows” which are; firstly, Free Flow of Goods by creating a tariff liberalisation and a trade facilitation within the region. Making the custom process more ready and standardised to build an ‘ASEAN Single Window’, this flow leads to economies of scale, and reduction in cost while increasing productivity, to the region. Secondly, Free Flow of Services which liberalises every service sector to leverage the flexibility within the ASEAN. Thirdly, Free Flow of Skilled Labour, support efficiency and effectiveness of qualified professionals’ mobility. Fourthly, Free Flow of Investment eliminates restricted regulations that not facilitate free flow and openness in an investment. Lastly, Free Flow of Capital that integrates the ASEAN’s financial market and capital market to ensure the trade’s strength and flow. The willingness of each nation to consolidate market is the problem that brings the most difficulty in success this pillar.
The second pillar, ‘Competitive Economic Region’, aims to create the appropriate competition environment within the ASEAN by setting policies in order to protect the customer right and businesses in the ASEAN. The most important component of this pillar is an infrastructure development which includes the transportation and logistics services. The crucial point is to enhance the efficient and secure transport network; not only physical infrastructure, e.g. road and rail, but also the soft infrastructure such as high-speed connection on internet and ICT application. To ease inter-border investment and financing on regional infrastructure are the most significant leverage to create a competitive economic in the region. The infrastructures are important in catching up the world’s advancement and speed up the equal competition within the region.
The third pillar, ‘Equitable Economic Development’, purposes to support the Cambodia, Lao PDR, Myanmar, and Vietnam (CLMV) and SMEs in the region for creating the fair competition and promoting the advanced competitiveness environment. It also aims to strengthen the ASEAN’s competitive capacity in international level. The gap that exists within the region can slow down the process in success of this pillar. The last pillar, ‘Integration into the Global Economy’, even though it has existed over the decades that ASEAN has signed Free Trade Area agreement with major partners in the world market, the AEC will act as the one partner to the other markets, for instance, with China where the ASEAN benefits most because of its early economic recovery.
Part Two: Benefits of AEC
In 2012, the ASEAN is in the phase III of the ASEAN Economic Community Blueprint which consists of four phases, the master plan in creating the AEC, which some benefits and obstacles in turn into new economic community have appeared and those can be learned in order to adjust the new plan, maintain the effectiveness of it and hasten the efficiency. Regard to the four-pillar, the benefits of the AEC are; attract new FDI both from within and outside the region as a result of larger market, openness and free flow within the ASEAN that are caused by non-tariff barriers. These can promote the technologicals improvement and hasten the trade integration of the region which leads to the independence from external regions’ economy. In the past, the ASEAN has relied its economic growth and trade with the major partners such as United States and European Union.
As the AEC becomes more integrated, the more productivity growth and more strength in international competition capacity it will be and it will also less vulnerability to external crisis. The economies of scale is another benefit that the AEC can received if the successful of the ‘Single Market and Production Base’ happens which bring about to the cost reduction in production because of the tariff liberalisation. As soon as the free flow of skilled labour occurred, the level of education will increase dramatically which improves the living standard and income standard. Not only well-beings will arise but also the decreasing of poverty in the region will truly happen. By adding the new infrastructure to region, the convenience in communication, travel and trade will support the competitiveness of the ASEAN.
Part Three: Challenges of Becoming AEC
When the massive progression takes place, the challenges and problems that present obstacles and slow down the processes of transformation will occur and cause difficulties in reaching the goal. From the earlier processes till 2012; the third phase, the problems that struggle the ASEAN Economic Community Blueprint have been reviewed and observed through the scorecard measurement that evaluates each phases of four-pillar. The percentage of completed tasks comparing to the benchmark is showing both successful and unsuccessful performance of the AEC.
Source: Adapted from ASEAN Secretariat (2012).Chartering Progress toward Regional Economic Integration .ASEAN Economic Community Scorecard, 8-15. Retrieved August 21, 2012, http://www.aseansec.org/publications/ASEAN_AECFactBook.pdf According to the scorecard the most successful area in the four-dimension is the ‘Integration into the Global Economy’; phase I achieved 100% and phase II achieved 77.8% (on average of 85.7%), as suggested in the prior part that ASEAN have done many agreement with world partners so it is the task that every nations in ASEAN can do best as a result of well experienced. The most difficult part is ‘Single Market and Production Base’; phase I achieved 93.8% and phase II achieved 49.1% (on average of 65.9%) and closely followed by the ‘Equitable Economic Development’ that is on average of 66.7%.
These are the areas where the ASEAN cannot do well because of the gap between members, obviously that ASEAN-6 and CLMV are very apart in standard of living and education which lead to lack of attention from those laggards in improving equality abilities toward the AEC, as well as the behindhand infrastructure development countries such as the Philippines, Lao PDR and Vietnam that have to catch up with others (Basu Das, 2012, p.4) the lack of financial support could be the main cause because to build up the strong infrastructure network, it requires massive financial investment not only for the construct platform but also the management tasks. Those other countries are also slow in implementing the plan, for example, in Thailand; the corruption has slowed the development progress. In Cambodia and Myanmar, political restrictions and barriers are controversial and unpredictable.
Another challenge is the ASEAN nations see each other as competitors not partners, for instance, Thailand and Vietnam in Rice industry, they compete to lead in the sector, they not intend to become the single market in reality. Moreover, trade within the ASEAN is relatively low compared with other regions in the world (A. Frankel J. & Wei S., 1997, p.312). This causes the weakness of the ASEAN in competing with other regional integration because its economy, including the export and import, depends on other countries and leads to financial weakness. Lastly, the language struggle is a major issue. People in the ASEAN are lacking in linguistic skills, except in Singapore, Malaysia, and the Philippines, they cannot speak English and Chinese which are the main business median languages so it seems to bring the inequality to the people in region and slow the success of ‘Free Flow of Labour’.
The AEC is the most crucial task that the ASEAN has to complete in order to have a sustainable growth in financial and economic affairs in the future. Though the establishment of the ASEAN was long, the gap between nations still exists. And even though outstanding performance is the most attractiveness from investors, the readiness in infrastructure is still questionable. Towards the AEC era requires hard working and cooperation within the ASEAN, the success of the AEC can come from the readiness of individuals in region. Thus, education is the fundamental factor to create understanding in the AEC’s purposes. It can empower people to obtain the most benefits from the AEC and not to be taken advantages by foreign investors.
The foundation principles of the AEC are the four-pillars which will assist it in becoming a single market and key production base of the world. With an appropriate competitive environment and a developed uniformity the region can become a significant global economic engine. People should also be well-informed about the positive sides as well as the challenges in the transformation to the AEC so they can take full advantage of these opportunities. Nevertheless, the AEC is like other economic communities, it is essential to have a consistency in development, discipline and commitment of each nation in the community. As can be seen from the failure of the other communities such as the EU, the carelessness and indiscipline can cause on uncontrollable crisis that can affect people around the world and diminish confidence.
ASEAN FDI Database (2006).FDI Flow to ASEAN 1995-1st Quarter 2006.Statistics of Foreign Direct Investment in ASEAN, 13. Retrieved August 14, 2012, from http://www.aseansec.org/5187-1.pdf
ASEAN Foreign Direct Investment Statistics Database (2012).Top ten sources of foreign direct investment inflow to ASEAN.ASEAN Statistics.1. Retrieved August 14, 2012, from http://www.aseansec.org/stat/Table27.pdf
ASEAN Secretariat (2012).Chartering Progress toward Regional Economic Integration .ASEAN Economic Community Scorecard, Retrieved August 21, 2012, http://www.aseansec.org/publications/ASEAN_AECFactBook.pdf
Basu Das, S. (Eds.) (2012). Achieving the Asian Economic Community 2015: Challenges for member countries and business. Singapore: ISEAS.
Frankel, J., & Wei, S. (1997).ASEAN in a Regional Perspective. In J.Hicklin & D.Robinson & A. Singh(Eds.), Macroeconomic Issues Facing ASEAN Countries (pp.311-365). Washington D.C.: External Relations Department, Publication Services.
International Monetary Fund, 1994, World Economic Outlook, October 1994: A Survey by the Staff (Washington).
Larsen, F., & Aziz, J. (1997).ASEAN in the World Economy. In J.Hicklin & D.Robinson & A. Singh (Eds.), Macroeconomic Issues Facing ASEAN Countries (pp.299-310). Washington D.C.: External Relations Department, Publication Services.
The Conference Board (2012).Comparison of Base Scenario with Optimistic and Pessimistic Scenarios, 2012 – 2025.Global Economic Outlook 2012. Retrieved August 20, 2012, from http://www.conference-board.org/data/globaloutlook.cfm
Courtney from Study Moose
Hi there, would you like to get such a paper? How about receiving a customized one? Check it out https://goo.gl/3TYhaX