Commentary: The rebirth of the ASEAN miracle growth model
From inception to a shift towards connectivity, the ASEAN Economic Community gets a fresh boost as the region doubles down on building digital capabilities, says ISEAS-Yusof Ishak Institute’s Sanchita Basu Das.
SINGAPORE: The ASEAN Economic Community (AEC) has come a long way since it was conceptualised in 2003.
A market of 542 million people, ASEAN was then growing at a rate of 5.5 per cent vis-a-vis the global growth of 4.2 per cent.
Fast forward fifteen years later. ASEAN is a market of 642 million people, growing at a rate of 5.9 per cent, much higher than the global economic growth rate of 3.8 per cent.
And its share of global economic prosperity has also shot up. ASEAN’s contribution to global income has risen from 1.9 per cent to 3.5 per cent over these years.
GROWING TRADE, INVESTMENT AND PEOPLE LINKAGES
The upbeat story of ASEAN’s growth is one about the huge expansion of trade, investment and people’s movement.
In 2003, while total merchandise trade, investment and visitors’ arrival through tourism flows stood at US$825 billion, US$24 billion and US$38 million respectively, those numbers have more than tripled at US$2.6 trillion, US$137 billion and 126 million respectively in 2017.
This means trade, investment and people movements have risen at 9.2 per cent, 14.3 per cent and 9.7 per cent respectively each year over the same period.
Drawing Foreign Direct Investment (FDI) that simultaneously promotes international trade has always been a key imperative for the ASEAN countries to establish an AEC.
In the late 1990s, as the ASEAN countries were suffering from the Asian Financial Crisis; China was fast emerging as a manufacturing powerhouse in the region, diverting FDI away from the region. India was also fast developing itself as a services hub, leaving the ASEAN countries behind.
In this scenario, the decision of the 10 small Southeast Asian countries to integrate themselves and provide economies of scale to entice foreign investors back to the region has proven to be a wise one.
GREATER INTEGRATION WITHIN SOUTHEAST ASIA
ASEAN had always looked for two kinds of economic integration, both an intra-regional one within member countries themselves, and the other between ASEAN countries and the rest of the world.
To encourage intra-regional flows, ASEAN had decided not only to eliminate trade tariffs among its members but also got commitments from the ten economies to harmonise rules and regulations, modernise customs, build institutions and invest in infrastructure in their national economies.
In 2017, of total ASEAN’s trade, investment and tourism flows, intra-regional goods flow accounted for 23 per cent, services flow 17 per cent, investment around 20 per cent and people movement 37 per cent.
Although intra-regional flows remain modest, they have the potential to go up as ASEAN countries undertake domestic reforms and build infrastructure.
Moreover, given current global conditions, where the US and China are on a verge of a prolonged trade war, and an impending Brexit, ASEAN countries can be attractive alternative destinations for foreign investors.
TRADING MORE WITH THE WORLD
As ASEAN pursues greater integration among member countries, it has also doubled down on the lowering of other trade barriers with the rest of the world.
The region has signed free trade agreements or made other institutionalised arrangements with its major economic partners over the last two decades – including China, Japan, South Korea, India, Australia and New Zealand.
As ASEAN countries' manufacturing supply-chains spread out beyond the region and often include these big economies, promises to reduce tariffs or increase connectivity with these countries are obvious enablers for higher trade and investment in the region.
One obvious example of such supply-chain network is the automobile industry in ASEAN, production of which can be sliced into 30,000 to 40,000 parts across multiple geographies.
For a Japanese auto manufacturer, such as Toyota, Honda or Nissan, while decision for investment policy is carried out in Japan, production of auto parts like the front wheel, the clutch, the gasoline engines, the transmission, the engine computers and many others are done in ASEAN countries, namely Malaysia, Indonesia, the Philippines, Thailand and Vietnam, depending on each of their competitive advantage.
A DIGITAL REGION
A new era is dawning on the grouping, giving it fresh imperative to push harder on economic integration. ASEAN has recently shifted its focus towards the digital economy.
In 2018 alone, the ASEAN countries are working on several deliverables, namely the ASEAN Single Window (ASW), e-commerce and the ASEAN Smart Cities Network.
This is not surprising as of total ASEAN’s population, around 75 per cent or 480 million are internet users and almost all are mobile phone users. More than 50 per cent of ASEAN’s population is under 30 years old and have greater affinity for technology and internet-based transactions.
ASEAN countries have been paying attention to building Information Communications and Technology (ICT) infrastructure for a while, where mobile broadband penetration is relatively high in most ASEAN nations.
ASEAN countries therefore have great reason to develop their e-commerce industry, which is relatively small and concentrated in the advanced ASEAN countries.
To develop the industry across the region, the ten countries are working on the e-commerce ecosystem (i.e. customs, logistics, payment solutions, online security and data flows), to make transactions between consumers and producers more seamless yet safe.
A future where e-platform giants, such as Amazon, Lazada, Shopee, Zalora and many new ones can carry out business operations in the region at a low cost and seamlessly is at hand.
Five ASEAN countries, namely Singapore, Malaysia, Thailand, Indonesia and Vietnam, have gotten together to operationalise the ASW earlier in 2018, meaning that traders now only need to submit one report with import and export information that national regulators in these five countries can freely access via an electronic system.
Gone will be the old method of submitting paper documents to multiple government agencies to obtain goods clearance, thus reducing the time and transaction costs that companies used to bear, on top of increasing transparency.
Finally, ASEAN has decided to raise regional connectivity through the Smart Cities Network. 26 pilot cities across 10 ASEAN countries have been identified as testbeds where technology and digital solutions will be applied to address traffic congestion, pollution, sustainable energy, and other development challenges modern cities face due to rapid urbanisation.
It’s a win-win for ASEAN’s ties with its major economic partners, where investments in projects are open to all for financing and the sharing of best practices with respect to technology, governance and sustainable development.
A LONG WAY IN COMING
Indeed, ASEAN has come a long way from its humble beginnings of the 1990s when it primarily looked at the traditional economy to raise trade and investment in the region.
From a cautious approach by staggering its liberalisation process from merchandise trade to services and investments later, ASEAN has since moved to undertake economic integration on a more comprehensive and ambitious scale to enhance trade, investment, people and infrastructure connectivities both among its member economies and with the rest of the world.
Its advancement in the digital space will not be without new dilemmas however. While these efforts help small- and medium-sized enterprises plug into regional supply-chains and expand business operation overseas, it also raises new challenges of cybersecurity, privacy and data flows in the region.
But developments on the whole suggests there is room for optimism in the shift underway. ASEAN’s efforts at strengthening cooperation both across the traditional and digital economies can help boost ASEAN’s competitiveness and growth in a way that is sustainable.
And this new vision of enhanced connectivity will support greater trade, investment and innovation needed to ensure the region remains a vibrant and resilient region going forward.
Dr Sanchita Basu Das is Lead Researcher for Economic Affairs at the ASEAN Studies Centre of ISEAS - Yusof Ishak Institute.