ASEAN Economic Integration:Driven by Mandarins or Markets?

Hal Hill

Australian National University

Jay MenonAsian Development Bank

March 2010

For presentation to ISIS Malaysia, April 30, 2010

(prepared for Oxford Handbook of International Commercial Policy, eds Kreinin and Plummer)

Contents

(1) Introduction

(2) ASEAN and ASEAN Economic Development

(2.1) The Evolution of ASEAN

(2.2) The ASEAN Economies: an Overview

(3) ‘Old Issues’: Merchandise Trade

(4) ‘New issues’: Services, FDI and Regional Economic Architecture

(4.1) Deepening Integration: services trade, FDI, Labour

(4.2) The Rise of PTAs

(4.3) From ASEAN to the East Asian Summit, and Beyond?

(5) Retrospect and Prospects

(1) Introduction

Bangkok Declaration, August 1967:‘To accelerate the economic growth, social progress and cultural development in the region … To promote regional peace and stability…. To promote active collaboration and mutual assistance … in the economic, social, cultural, technical, and administrative spheres.’

ASEAN the most durable regional association in the developing world.Four defining characteristics:

a) Diversity – greater than any other major regional grouping. History, language, politics, and especially economics (50:1 GDP/cap), population, resource endowments.

b) Generally rapid economic economic development.But ASEAN membership no guarantee (Myanmar)

c) Avoidance of strong supra-national organization; deliberately under-powered secretariat; the ‘ASEAN Way’ – strengths & weaknesses.

d) Unlikely to ever be an EU-style organization; or a customs union with common macroeconomic policies.

Major contribution is increased regional harmony and understanding.Does it need to be more than that?

Table 1: ASEAN - Major Dates

August 1967 Bangkok Declaration establishes ASEANFebruary 1976 Major Bali SummitJanuary 1984 Brunei joinsJanuary 1992 AFTA/CEPT launchedJuly 1995 Vietnam joinsJuly 1997 Laos and Myanmar joinDecember 1997Vision 2020 to accelerate economic integrationApril 1999 Cambodia joinsMay 2000 ASEAN Plus Three announce Chiang Mai InitiativeOctober 2003 ASEAN Economic Community launchedFebruary 2009 Expanded CMI launched

(2) ASEAN and ASEAN Economic Development

(2.1) The Evolution of ASEAN

Four phases:

I) 1967-76: Early days, building understanding, 5 members.Adoption of the Kansu Report, reflect of prevailing thinking, selective, product by product deals, development of sectoral programs.

II) 1976-92: Bali Summit, Feb 1976: Began formal programs, AIJV’s, APTA, AIP’s, AIC. Consistent with Kansu, other developing regions. 1975 unification of VN, communist Indo China a trigger.ASEAN beginning to caucus effectively on economic and strategic issues.But four economic programs made little progress; APTA concessions minimal.Major unilateral reforms in mid 1980s (esp RI); RP consumed by problems.

III) 1992-97: Adoption of AFTA a major breakthrough – ‘free trade’, timetable (CEPT 0-5% by 2008), negative list.Drivers: • recognition that 1976 measures largely cosmetic; • fast changing global and regional landscape (NAFTA, EU, APEC, Uruguay Round);• increased domestic confidence after 1980s reforms;• competition from China.

From 1994 remaining 4 mainland states joined, with phased in CEPT; ASEAN useful in cementing outward orientation in these economies.By 2009, 80% of late-comer exports moved into Inclusion List, of which tariffs 0-5% for two-thirds of products.

By mid 1990s, moving into services trade (AFAS), FDI (AIA) and labour (ALA).

IV) 1997-98 - : Period since the AFC. AFC had two principal effects.• Economies weakened, over-shadowed by China, policy makers distracted, ASEAN unable to play a role (Hadi: ‘The public has been largely disappointed with ASEAN …’).• Rethink about economic cooperation; more than trade; macro & finance increasingly dominating the agenda.

Four issues characterized this phase, the 21st century.• Spread of extra-regional PTA’s; Singapore impatience.• Macro, international finance dominating the agenda, and ASEAN too small to handle on its own.• ASEAN completed the ‘easy phase’ of CEPT. Average tariff for ASEAN-6 declined from 12.8% to 1.5%, 1993-2009. Remaining areas sensitive – heavy industry, agriculture, other politically sensitive areas.• Rapid rise of fragmentation trade, esp Singapore, Malaysia, Philippines, Thailand (Athukorala); by 2005-06, 44% of ASEAN manufactured exports (higher for these countries); fundamentally incompatible with PTA’s.

(2.2) The ASEAN Economies: an Overview

See Table 2 for summary indicators.Great economic diversity, even excluding Singapore-Brunei; also social indicators vary widely.Have both service-driven and mainly agrarian economies. Large differences in economic structure, resource endowments mean more complementarity than generally realized.Demographic diversity.

Economic composition differs from other groupings: not a NAFTA, US rich & dominant; EU, 4 large rich economies dominate; nor SARC, Mercosur, SADAC (India, Brazil, SA dominant).By the far the richest ASEAN country very small, ‘vulnerable’ (Leifer).The largest economy low profile, often pre-occupied, low-income.

Trade, commercial policy regimes also highly diverse (Table 3).Singapore, Malaysia, Thailand ‘always open’; others increasingly so (unilaterally) only since the mid 1980s.

Table 2: ASEAN, Key Socio-Economic Indicators

Table 2 (cont)

Table 3: ASEAN Trade and Commercial Policy Regimes

Country Trade/GDP, 2007 (%)

FDI Stock/G

DP, 2007 (%)

Average Tariff, 2006

(wtd, %)

Econ Freedom

(rank)

Reg Quality

(% rank)

Doing Business

(rank)

Brunei 95 82 na (v low) na 75.8 14

Cambodia 138 49 10.8 106 34.3 22

Indonesia 55 14 4.3 131 45.4 19

Laos 87 28 9.3 150 9.7 24

Malaysia 200 43 3.4 58 60.4 4

Myanmar na 29 3.9 176 1 na

Philippines 85 13 3.2 104 51.7 21

Singapore 429 160 0 2 99.5 1

Thailand 144 35 4.7 67 59.9 3

Vietnam 167 60 13.3 145 32.4 13

FDI histories, policies also very different: Singapore, Malaysia, Brunei always very large foreign presence; Indo China catching up quickly.Regulatory regimes, etc generally follow pci rankings – Singapore always very high; historical distinction between lower-income ASEAN-5 and Indo China economies narrowly quickly.

(3) ‘Old Issues’: Merchandise Trade

Three features dominate:a) Extra-regional trade much larger than intra-regional; unlike EU. See Figure 2. Intra-ASEAN generally 15-30% of total; generally increasing, reflecting the countries’ increased share of global trade; now less dominated by commodities.

b) Singapore still dominates intra-ASEAN trade, about 70%. See Table 4. Top 10 account for 74.2% in 2007. Sing trade with Mal, RI and Thai still, always the largest regional bilateral flows. Only non-Sing trade in top 10 is Malaysia-Thailand. The importance of ASEAN also varies across countries; eg always lower for RP. The Java-Sumatra-Singapore-West Malaysia-Thailand corridor historically dominant.

c) These trade shares reflect country shares in the world. Disappointment that not higher misleading: adjusting for world trade shares, ie, trade intensity indices, trade already very high. See Table 5. Most at least 2, some more than 5. Extremely high for some Indo China.

Hence: customs union not feasible; if ASEAN to adopt common external trade regime, would have to be Singapore’s, ie, free trade.

Table 4: Major Intra-ASEAN Trade Flows(10 major flows in 2006, % of total intra-ASEAN Trade)

Exports to:

From:

Indo Malaysia Phils Sing Thai VN

Indonesia 4.8

Malaysia 13.2 4.5

Singapore 13.2 18.9 2.7 6.0 2.9

Thailand 3.5 4.5

Figure 2

Table 5

Trade Intensity Index, 2006

ASEAN Country

Partner

 Brunei  Cambodia  Indonesia  Lao PDR  Malaysia  Myanmar  Philippines  Singapore  Thailand  Viet Nam ASEAN

 Brunei Darussalam -- 0.04 19.66 0.00 3.73 0.10 0.15 5.88 2.19 -- 5.75

 Cambodia 0.05 -- 1.55 1.82 1.09 0.08 0.27 2.84 6.12 15.28 3.29

 Indonesia 26.36 1.76 -- 0.27 3.33 2.96 1.98 7.37 3.27 3.40 3.94

 Lao PDR 0.00 1.13 0.20 -- 1.33 -- 0.03 1.02 52.60 26.19 11.79

 Malaysia 3.75 1.20 3.61 1.82 -- 3.04 3.30 8.66 5.01 3.16 4.33

 Myanmar 0.08 0.05 2.39 -- 2.65 -- 0.22 5.22 33.64 2.71 8.71

 Philippines 0.16 0.26 1.60 0.04 3.53 0.28 -- 4.99 3.23 3.02 3.17

 Singapore 4.03 3.04 9.03 0.79 9.63 3.77 3.97 -- 3.65 4.03 4.87

 Thailand 2.11 13.32 3.04 57.21 4.31 36.33 3.43 3.42 -- 4.44 3.34

 Vietnam -- 30.52 2.71 29.84 2.38 2.92 2.52 6.01 4.36 -- 3.86

Notes: Trade intensity index is the ratio of trade share of a country/region to the share of world trade with a partner.

.. Not applicable or data unavailable

Source: ADB Asian Regional Integration Center 2009, Integration Indicators Database

(4) ‘New issues’: Services, FDI and Regional Economic Architecture

Received attention from mid 1990s; argument that regional groupings of like-minded members can move faster on these issues. Then can multilateralize, hence PTA’s can become ‘building blocks.

ASEAN evidence mixed.

(4.1) Deepening Integration: services trade, FDI, Labour

Various agreements signed in the 1990s, implementation commenced after 2000.

AFAS: Very limited progress (Rajan and Sen, 2002), in part because services last sector to be liberalized. Services trade very strong within the region though very difficult to measure: proximity matters more for services, and probably greater complementarity than for goods trade.

Almost entirely market-driven: preferential agreements wouldn’t make sense. Can be facilitated by visa, customs, etc agreements.

AIA: Rapid growth in intra-regional FDI, mainly from Singapore and Thailand. Virtually all market driven; influence of AIA marginal.For all except the very small IC economies, extra-regional sources dominate. See Table 6.

ALA: Here also major complementarities, between very open labour importers – the four richest economies – and the rest. Driven by market forces; reinforced by proximity and ethnic/linguistic similarities. ALA appears to play a very minor role.Difficult to obtain accurate estimates of the matrix of intra-regional (temporary) migration stocks. See Table 6a for some approximations.For the region’s largest labour exporter, RP, extra-regional destinations are more important than ASEAN.

(2.2) The Rise of PTA’s

ASEAN countries generally unilateral/multilateral until around 2000.Then rapid growth: by June 2009, 73 signed or implemented; 41 under negotiation; 33 proposed. See Table 7. Range from comprehensive to ‘trade-lite’.

ASEAN Shares of FDI and Trade

Country ASEAN share of inward FDI

(%)

ASEAN share of exports, 2006

(%)

ASEAN share of imports, 2006

(%)

Brunei 7.8 24.8 47.9

Cambodia 30.9 na na

Indonesia 27.4 18.3 31.1

Laos 21.5 na na

Malaysia 27.2 26.1 24.4

Myanmar 14.6 na na

Philippines 0.1 17.3 19.8

Singapore 3.4 30.9 26.1

Thailand 31.6 20.9 18.4

Vietnam 17.5 16.1 27.9

Table 6a

Singapore by far the major adopter, in spite of muted ASEAN unhappiness. Reflects its impatience with pace of ASEAN, and quick response to behaviour of majors. Puzzling, but has made some services concessions in exchange for improved access; countries see it as a training exercise.

Will these PTA’s collapse into a ‘plurilateral’ Asian FTA centred around ASEAN? Unlikely: different ROO’s, exemptions, myriad trade-plus issues in each. The majors (US, EU, Japan, increasingly China) unlikely to agree to ‘consolidate’ these.Little evidence of ‘open regionalism’ outside ASEAN itself.Some of the concessions of little value as MoP’s continue to decline. Eg, within ASEAN itself, less than 10% of trade avails of AFTA concession.An ASEAN plus Three (APT, ASEAN, China, Japan, Korea) would cover only 6% of the region’s total PTA’s.An ASEAN plus Six, ie, APT, plus Australia, NZ and India, covers 25%.And does not address the issue of rapidly growing ‘fragmentation trade’ occurring largely outside these PTA’s.Note that PTA’s also impose a huge burden, distraction on the small transition economies, limited analytical capacity, big reform agenda.

Table 7

(4.3) From ASEAN to East Asian Summit, and Beyond?

The more regional issues involve macro and other coordination challenges, the more non-ASEAN parties involved.Although ASEAN economies small, increasingly over-shadowed by the giants, adroit balance of power politics, rivalry between giants (esp China and Japan) means ASEAN still in the driver’s seat.

APT has become increasingly important within East Asian economic integration, ambitious overtures from China, ACFTA commences January 2010. Plus broader macro issues require involvement of larger NE Asian economies with huge reserves, more diplomatic clout.

From ASEAN Economic Community to APT, will latter morph into the ASEAN plus Six, ie, East Asian Summit? See Figure 3.

Will this lead to some sort of formal economic agreement of substance, either preferential or open regionalism? Or APEC-style, reinforcing unilateral reforms, a forum with a broader international agenda? Or possibly even an ‘Asian-6 Caucus’ within the G20?Not year clear, embryonic. Major, quick breakthrough unlikely.

Macro coordination issues dominated by the large East Asian economies, originally in response to the AFC and unhappiness with the IMF; more recently to the GFC.

Several initiatives launched in 2000: the Chiang Mai Initiative (CMI), regional reserve pooling; regional economic reviews/surveillance; development of the Asian Bond Market.

So far, little substantive progress. CMI not used during the GFC; countries resorted to bilateral swaps and stand-by agreements with major economies (mainly China and Japan), plus limited role for IFI’s. An enhanced CMI (CMIM) launched in 2009. Its current size ($120 billion) probably inadequate. Issues of conditionality, etc still to be resolved.

An Asian Currency Union (ACU) exists as a formal proposal. Unlikely to become operational in the foreseeable future. If it were, likely to be dominated by the larger NE Asian economies.

(5) Retrospect and Prospects

ASEAN is durable! Played major role in promoting regional harmony in a divided region. Enabled govts to promote rapid socio-economic development. Regional initiatives take decades to develop (eg, the EU).ASEAN has been skillful at playing ‘balance of power’ politics with larger countries (Acharya, 2009); also caucusing on international issues of common interest.

Little progress in fostering formal economic integration. See Table 8. Some in merchandise trade, mostly multilateralized; very little on services trade, investment, labour; none on broader macroeconomic policy coordination.

Too much on summits, charters, declarations? Eg, Severino (2006):‘Regional economic integration seems to have become stuck in framework agreements, work programmes and master plans.’ ASEAN as an institution not able to act during times of economic – not to mention political – crisis.

‘Will the world take ASEAN seriously if it doesn’t take itself seriously?’

Yet ASEAN’s primary success derives from the success of its individual member countries, apart from Myanmar and occasionally RP.Consider the counter-factuals: suppose the conflict, turbulence and uncertainty of the 1960s still prevailed?

Moreover, ASEAN pragmatism is effective. An EU-style custom union is not feasible given the huge differences between countries, so preferential agreements that are largely multilateralized, with liberal ROO’s, an effective alternative.

And much scope for shaping broader regional and international issues by caucusing as a group.

To return to our main question: the ‘Mandarins’ have created a conducive regional environment in which markets have promoted economic integration.

Table 8: Indicators of Economic Integration

Indicator ASEAN EU NAFTA CER Mercosur

Free trade in goods part yes yes yes part

Free trade in services part yes part yes part

Capital mobility (FDI) part yes part yes part

Labour mobility no yes no yes no

Competition law converging

no yes no yes no

Monetary union no yes no no no

Unified fiscal no part no no no