THE ASEAN Economic Community (AEC) can facilitate ASEAN’s further integration into the global economy and create conditions to foster economic development and inclusion. When it is fully operational, the AEC will feature a single market where goods, services, capital and skilled labor will flow more freely. While 2015 will be an important symbolic milestone, the roadmap will not be fully implemented by then. The principle of the “ASEAN way” embodies the notions of non-interference, minimal institutionalization, and operating by consensus at countries own pace. According to a recent Asian Development Bank (ADB) study, ASEAN “has no prospect of coming close to... a single market by the AEC’s 2015 deadline -- or even by 2020 or 2025.”
Growing intra-ASEAN trade is already benefitting the region, strengthening regional production chains, making possible the diffusion of new technologies, stimulating foreign direct investments (FDI), and helping raise employment. ASEAN countries are transitioning to more domestic demand-driven growth models, supported by youthful demographics, a rising middle class, improving connectivity and investments in infrastructure. These factors should help drive intra-ASEAN trade in final goods and services. It should also benefit ASEAN’s trading partners, help to narrow ASEAN current account surpluses and reduce global imbalances.
Full implementation of AEC commitments could lead to large welfare gains, adding as much as 5% of ASEAN GDP. By ASEAN’s scorecards, progress is being made and over three-quarters of AEC targets have been reached. ASEAN’s gains would be higher if the AEC leads to free trade agreements with external partners, including the Regional Comprehensive Economic Partnership (RCEP) and the Transpacific Partnership (TPP).
AEC’s challenge is to create a region-wide enabling environment that facilitates growing connectivity and promotes high quality, inclusive growth. Investment must increase to close gaps in hard and soft infrastructure and skills, and financial fragmentation must be overcome by harmonizing standards and regulations. ASEAN countries must also strengthen labor market and social insurance institutions in order to prepare for and better deal with the possible adverse effects of greater integration.
Tariff rates are either zero or low for nearly all goods in ASEAN, but trade and transport costs are still high. The priority is to remove nontariff barriers (most of them behind-the-border measures) that are the most important remaining hurdle to AEC’s goal of a “single market and production base” and strengthen trade in services, particularly high value-added ones. ASEAN must ratify and act on regional agreements (e.g., ASEAN Single Window in customs, regional transport links) and align them with national domestic laws. In the Philippines, while more than 99% of goods of ASEAN origin have zero tariff, tariffs on sensitive agricultural products remain elevated (in 2015, the Philippine rice tariff on imports from ASEAN will fall to 35% from 40%, and for sugar, the tariff will drop to 5% from 10%).
To close the region’s hard infrastructure gap (up to $1 trillion over 10 years according to the ADB), it will be important to step up regional cooperation and leverage regional resources, including by expanding the ASEAN Infrastructure Fund and tapping into new initiatives like the Asian Infrastructure Investment Bank. The Philippines also has room to raise government infrastructure spending from its very low levels by mobilizing revenue and expediting implementation of PPPs with due regard to fiscal risks.
It is also imperative to improve ASEAN’s soft infrastructure, including its investment climate. Apart from Singapore, Malaysia and Thailand, ASEAN countries rank below average in the World Bank’s Doing Business index (Singapore tops competitiveness rankings and accounts for 40% of FDI into ASEAN). Foreign ownership restrictions are still common, particularly in services, and should be reduced. This is particularly true for the Philippines where foreign investment restrictions are pervasive and reducing the cost of doing business is stifled by a weak competition framework.
Financial integration lags well behind trade integration in ASEAN. The ASEAN Banking Integration Framework aims at creating a “semi-integrated” market by 2020 with a limited number of national champions, the Qualified ASEAN Banks. The European experience demonstrates the need for stronger regional mechanisms to manage risks from the rise of such large banks. Efforts to develop bond markets in Asia are bearing fruit, including the Asian Bond Market Initiative. With growing investor bases, higher liquidity and lower yields, ASEAN-5 bond markets could expand rapidly and power a “twin engine” ASEAN financial system that funds its large infrastructure needs. Consideration could also be given to a regional central counter party to benefit from economies of scale. ASEAN stock exchanges and regulators are creating an “ASEAN asset class” that could be a liquid asset for institutional investors and a few exchanges have linked up so that investors can trade seamlessly across borders, although obstacles remain with respect to mutual recognition.
The AEC’s commitments focus on facilitating mobility of skilled labor, implemented through mutual recognition agreements (MRAs) for qualifications in a number of professional services. MRAs may not allow unrestricted mobility of foreign professionals if they conflict with domestic rules and regulations requiring further progress on harmonization of standards.
Stay tuned for next month’s column that will focus on the challenges for the Philippines.
(The author is the IMF Resident Representative for the Philippines. The views expressed herein are those of the author and should not be attributed to the IMF, its Executive Board, or its management.)
source: Businessworld
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