ASEAN positions itself as Asia's "third force" Businesses seeking to expand their operations in South East Asia should prepare for the establishment of the ASEAN Economic Community at the end of 2015

ASEAN flags

South East Asia is setting its sights on the regional benefits of greater integration, and businesses operating in the region will want to monitor carefully the next steps in the process.

The ASEAN Economic Community (AEC) will be established by the end of 2015, and will integrate the ten member states of the Association of South East Asian Nations (ASEAN) into a single economic and free trade area. This will be no easy task in a region hallmarked by distinctive cultures, histories and languages, in addition to historic political frictions between some of its members, but ASEAN believes the opportunities in a fastchanging world outweigh the challenges ahead.

The founding of the AEC is the next logical step for ASEAN, which was founded in 1967 and today comprises seven countries in mainland South East Asia: Cambodia, Lao PDR, Malaysia, Myanmar, Singapore, Thailand and Vietnam, plus two vast archipelagos, Indonesia (13,466 islands) and the Philippines (7,107 islands), and Brunei Darussalam, which shares the island of Borneo with Malaysia and Indonesia.

In geostrategic terms, now is the optimal time in ASEAN’s history for deeper integration. The establishment of the AEC aims to create a unified economic bloc that can compete for a greater share of the direct investment flowing into and around Asia Pacific, and position itself as the “third force” after India and China in the region. It also seeks to provide the populations of each country with greater employment opportunities, enhanced infrastructure and improved social integration.

Further insights within this article

Breaking down commercial borders
The trend towards greater economic convergence has been increasingly evident in South East Asia. The region has successfully recovered and restructured from the prolonged damage caused by the 1997 Asian financial crisis, a process that takes longer than is often assumed, as economic planners and politicians in Europe and North America have discovered since the financial crisis of 2008. In recent years, ASEAN has also negotiated free trade agreements (FTAs) with China, Korea, Australia and New Zealand, India and Japan, and lifted numerous trade tariffs between members.

Commercial borders have been softened by the emergence of new industries, such as alternative energy and wafer fabrications, a booming internet economy that facilitates easier cross-border trading and strong inbound and intra-regional investment – particularly in manufacturing. Consumer spending is expanding and travel and tourism are flourishing.

Underpinning these factors, overland trade routes have strengthened, particularly the corridor between ASEAN and China’s western provinces, and flying between South East Asian countries is easier, more efficient and cheaper as the result of the region’s expanding low cost carrier (LCC) sector.

Optimizing its geographical positioning is another critical factor. The enhanced interconnectivity between ASEAN and its three important North East Asian partners, Japan, Korea and China, and with the fast-growing economy of India to the west, means South East Asia is expected to be a dynamic engine of future growth across Asia Pacific.

A global economic force
“This is ASEAN’s time,” stated Najib Razak, Prime Minister of Malaysia, in his opening address as Chair of the 26th ASEAN Summit, held in Kuala Lumpur in April 2015. “The region is moving forward as an economic community by January 1, 2016, and we must accelerate programmes to harmonize standards, increase capital market and financial integration, and promote the freer movement of goods, services, investments and talents between our countries.”

Although the AEC is not seeking to mirror the structure of the European Union – there will, for instance, be no ASEAN Central Bank, ASEAN Parliament or ASEAN single currency for the foreseeable future, and it is unlikely to expand beyond its ten members – the economic fundamentals of the AEC suggest favorable timing. The ten member states have a combined nominal GDP of approximately USD 2.5 trillion, and together sucked in more foreign direct investment per capita in 2014 than China. The ASEAN Financial Integration Framework, adopted by ASEAN Central Bank Governors and Finance Ministers in 2011, envisages a more integrated financial region by 2020.

A McKinsey 2014 report notes that if ASEAN were a single country, it would already be the seventh-largest economy in the world, and it is projected to rank as the fourth-largest economy by 2050. It is already the world’s largest trading region, after Europe. The United Nations Population Division predicts the population of ASEAN will increase from around 633 million people at the end of 2015, to 717 million in 2030, when the region will count three countries with a population exceeding 100 million: Indonesia (284 million), Philippines (127 million) and Vietnam (103 million).

In addition to attracting more investment and more business to South East Asia, the AEC will seek to increase regional economic prosperity and stability and, critically, reduce the development gaps between its members. Figures from the International Monetary Fund show that Indonesia’s projected 2015 GDP of USD 895.6 billion is barely comparable to Cambodia (USD 17.8 billion), Lao PDR (USD 12.7 billion) and Brunei Darussalam (USD 11.2 billion). ASEAN’s own figures show that in 2013, Singapore received 49.6 percent of the foreign direct investment into ASEAN, whereas the second-largest recipient was Indonesia with 15.2 percent, and at the lower end of the scale Cambodia received just 1.0 percent, and Lao PDR 0.3 percent.

Confronting the challenges ahead
Beyond the disproportionate economic development rates of its member states, ASEAN also recognizes that tough political challenges exist. The ongoing territorial disputes in the South China Sea, where China is asserting its claims, is causing nervousness among South East Asian governments.

So too are a heightened threat of terrorism amid concerns that radical Islamic groups are active in the predominantly Muslim countries of Malaysia and Indonesia, and increased piracy of commercial vessels in the Malacca Straits. The failure to find a regional solution to the refugee crisis of displaced migrants fleeing Myanmar and Bangladesh in summer 2015 also questioned the level of consensus in ASEAN decision-making when confronted by complex humanitarian issues.

The challenges ahead are considerable, and businesses investing and expanding in the region will need to pay close attention as the quest unfolds to realize an ASEAN community that is politically cohesive, economically integrated and socially responsible. Creating a trade ecosystem that can unite South East Asia while capturing and celebrating its unique differences is unprecedented, but a strong, cohesive trading bloc strategically located at the heart of global trade flows is a powerful proposition.

ASEAN is one of the success stories of the modern era. In two generations it has risen from poverty to prosperity. In doing this, ASEAN has set an example for developing countries around the globe that aspire to economic progress.

David Lipton, Deputy Managing Director, International Monetary Fund

The AEC: a European view

Timo Prekop
Executive Member of the Board,
German Asia-Pacific Business Association
Timo Prekop

Timo Prekop is Executive Member of the Board of OAV, the German Asia-Pacific Business Association.

For our members, the AEC will make an already interesting region more attractive. It is considered one of the three big centers of growth in Asia, and it is fair to say ASEAN has replaced India as the number two in Asia [after China] in terms of future market potential. German companies expect the AEC process will bring significant improvements for regional infrastructure as well as an ongoing harmonization of the norms and standards in the region. The need for substantial information about the complex economic, social and political conditions in the region is steadily growing.

One of the difficult challenges that investors face is developing a long-term strategy for ASEAN. The great divergence in terms of economic development between ASEAN members offers a high number of investment opportunities. Obviously, there are countries with big potential consumer markets like Indonesia, the Philippines or Vietnam. On the other hand, we have technologically advanced countries like Malaysia and Thailand, which have an increased need for state-of-the-art products from Germany. Countries like Laos and Cambodia also have considerable opportunities for growth since they can benefit from their favorable geographical location as transfer routes between mainland South East Asia and China. In addition, there are also several intra-ASEAN dynamics that have to be constantly observed.

The AEC: an Asian view

George Yeo
Chairman and Executive Director,
Kerry Logistics
George Yeo

George Yeo is Chairman and Executive Director of Kerry Logistics, Asia’s premier logistics provider.

2015 is an important milestone for the countries of ASEAN as they respond to a changing world economy by creating the AEC. The region stumbled after the Asian financial crisis, but is now seeing a new wave of growth. The cities and suburbs are expanding, consumer spending is rising, and there is a sense of optimism. South East Asia is a diverse region, though, so the AEC will not follow the same model as the EU, and it will be a long road to achieve full integration.

The geography of ASEAN, with its numerous islands and long coastlines, presents logistical challenges, but manufacturing investment is flowing from coastal China, partly because China itself is investing in South East Asia. At Kerry, we are trucking all the way from China to Singapore, and although there are differences in levels of infrastructural development between countries, we are starting to see greater connectivity between South East Asia and China, and to a lesser degree India. More transnational highways and rail networks will be built as China invests in regional infrastructure, plus improved sea and air routes enabling companies to achieve greater economies of scale.

The history of ASEAN
The Association of Southeast Asian Nations (ASEAN) was established on August 8, 1967 in Bangkok, Thailand, with the signing of the Bangkok Declaration by the five founding nations, Indonesia, Malaysia, Philippines, Singapore and Thailand. Brunei Darussalam joined in January 1984, Vietnam in July 1995, Lao PDR and Myanmar in July 1997, and Cambodia in April 1999.

ASEAN key statistics
• ASEAN became a USD 1 trillion economy in 2006, and passed the USD 2 trillion benchmark in 2011. Reaching USD 4 trillion is likely in the next five years
• The combined economy of ASEAN grew by 4.4 percent in 2014 (to USD 2.53 trillion – which is larger than India), and is projected to grow by 4.9 percent in 2015
• Foreign investment into South East Asia tripled from USD 49 billion in 2009 to USD 151 billion in 2014
• Total population of around 633 million in 2015 is projected to reach 717 million by 2030, with about two-thirds attaining middle class status
• ASEAN is the fourth-largest exporting region in the world, after the EU, North America and China/Hong Kong

ASEAN countries