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ASEAN: All Set to Go?

July 27, 2015
Editor(s): Edward Zhang
Writer(s): Yue Han Chung

Asia is no longer just about China and India anymore.

Over the past few years, the global economic power was shifted away from the advanced economies of G7 to the developing BRIC economies, including two Asian powerhouses China and India. However, in light of China’s recent economic downturn, a group of nations is slowly creeping into the spotlight.

Introducing ASEAN – The Association of Southeast Asian Nations, an international association that aims to promote economic trade, cultural exchange, social welfare and regional peace within its member states. Up until this point, the body has ten members in total.

ASEAN GDP
Brunei Darussalam $15 Billion Cambodia $17 Billion
Indonesia $889 Billion Laos $12 Billion
Malaysia $327 Billion Myanmar $63 Billion
Singapore $308 Billion Thailand $374 Billion
The Philippines $285 Billion Vietnam $186 Billion
A approximate total of 2.476 Billion USD at 2014

Data sourced from Knoema.com (2014)

With ten nations coming together as a single economic body, ASEAN’s GDP is already twice the size of the Australian economy and catching up to the British economy, not to mention surpassing French, Indian and Brazilian economies along the way. This has informally placed ASEAN as the sixth largest economic body in the world.

OPPORTUNITIES AHEAD

The ANZ economics team has predicted that ASEAN will grow to be the third pillar of Asian growth. In a recent forecast, ASEAN will be home to 650 million people by 2030, in which more than half of them will be at the age of 30 or under. With a young population, ASEAN will enjoy at least a generation’s worth of economic prosperity.

European Union has found a new liking towards ASEAN and is currently its largest investor, pumping at least 238 billion euros into ASEAN since 2013. Global investors are relocating their investments to cheaper and more stable markets since the Greek crisis and China’s stock tumble, providing the ASEAN economy with an opportunity that was once unavailable for them.

Business has never been better in ASEAN. It is inevitable that in time to come, ASEAN will emerge as the world’s next manufacturing hub to satisfy global demands. ASEAN is already the third largest trading partner of European Union outside of Europe, in which the EU takes in much more of ASEAN’s exports than the other way round. Between the two parties, a policy paper called ‘The EU and ASEAN: A Partnership With A Strategic Purpose’ has been drafted to lay down visions of probable collaborations in terms of security, trade and few other issues. The significance of this partnership would be a potential negotiation of a region-to-region free trade agreement, which would further strengthen economic ties between the two parties.

As China is slowly creeping up the value chain, Daniel Wilson, currently an economist at ANZ, claimed that low-cost industries would move southwards. Ever since China’s economic boom, minimum wage has been climbing. It is no longer cheap as before to operate in China and corporations are looking elsewhere to further improve their bottom line. As Standard Chartered’s head of thematic research, John Calverley, has mentioned, ASEAN would offer an opportunity for international firms to diversify away from China. Not only is ASEAN able to offer corporates labour at a lower cost, its favourable demographic, geographic location, and productivity improvement have been drawing companies into setting factories in ASEAN.

One of the key drivers of long term economic growth is through technological change and innovation. A country needs good universities, funds for research and development, a community of startups and venture capital in order to craft a suitable ecosystem to accommodate innovation. Singapore currently is spearheading the effort by hosting the MIT’s ASEAN Entrepreneurship Programme. Together with both the public and private sectors, they are already tackling some of the most difficult challenges in fields such as energy and healthcare. Another example would be MaybankFintech, a programme created by Southeast Asian bank to support tech start-ups involved in the financial technology industry.

MORE THAN MEETS THE EYE

Despite being in very favourable position, ASEAN’s rise is not without challenges. Within the ten member states, they vary widely in languages and regulations, posing a challenge for trading. Not to mention the difference in business practices and fund restrictions, making international trading with ASEAN somewhat difficult as compared to the rest of the world. Looking at custom procedures for example, the varying standards in every country in ASEAN means that just to cross from Singapore to Thailand through Malaysia would require three different sets of documents and procedures.

As a result, the association has been urged by European Union ASEAN Business Council to come up with standardised custom procedures to ease intra-ASEAN logistics. The council is also looking forward to a more relaxed and consistent regulation on foreign ownership and competition.

Moving outside of ASEAN, a strong external force poses a difficulty for ASEAN that it has yet to overcome. China’s actions of late have raised of tensions with some of the ASEAN nations. First off, China is competing against Brunei, Malaysia, the Philippines and Vietnam for territorial claims in South China Sea, in which 90% of the waters is believed to be rich in oil and gas. Despite having countries such as Singapore and Cambodia as potential mediators, the issue is not expected to be solved in the near future due to the conflicts of interest between parties.

Secondly, there has been speculation of China and Thailand signing a memorandum of understanding to build a shipping pathway called the Kra Canal. This pathway would affect maritime trade in Malaysia, Singapore and Indonesia by cutting a canal to bypass Malacca Straits all together.

Lastly, there are country-specific issues that need to be solved as well. Indonesia is taking a blow from the weakening commodity prices and experiencing a slowdown in fiscal spending. Malaysia is affected by the weak Ringgit and still has to deal with corruption and political headwinds. Some of the smaller ASEAN countries are also threatened by terrorism and transnational crime due to the lack of skills, training, as well as the technology to identify potential security issue.

ARE THEY READY?

The real question to be ask is whether ASEAN be able to shake off all the challenges and function together as a whole, or whether it would end up like its partner, European Union? One thing is for certain, they cannot be compared. European Union seeks regional integration and identity whereas ASEAN is in search of mutual benefit while simultaneously defending the unique culture and practices of each state. Countries will not interfere with each other’s domestic problems and try to work out the best way for cooperation. Although there has been rumours about transforming ASEAN into a currency union, Financial Review Journalist, Greg Earl, claimed that it is impossible for a 300 men strong bureaucracy to successfully plan or execute a common currency or fiscal policy.

Looking at the big picture, ASEAN is set at a very advantageous position but it is still held back by needs of reforms. Once taken off, we should be able to expect a rise in living standards in ASEAN, benefiting most of the locals.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ, our Partners and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

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Edward Zhang
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