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New realities

Released at: 08:00, 15/10/2014 AEC 2015

New realities

With the ASEAN Economic Community just 18 months away there is much for Vietnam to consider and prepare for.

by Thong Dat

The ASEAN Economic Community (AEC) that the ten ASEAN member countries hope to form at the end of 2015 will be ambitious, competitive and harmonious. Leaders of every member country talk of the AEC as being a new era of economic cooperation that will transform the region into an area with free movement of goods, services, investment, and skilled labour, and a freer flow of capital. Simply stated, the ten ASEAN countries will become more of an economic powerhouse, where investors can invest anywhere minus the tight restrictions seen previously, including tariff reductions and the streamlining of certain administrative procedures. Although the idea itself may sound attractive, the gains for Vietnam and for other ASEAN member countries will not come automatically, as competition will become fiercer for those that are not well-prepared. It is hard to avoid the question: is Vietnam truly ready for the AEC?

There are plenty of reasons for hope and optimism. ASEAN has an aggregate economic size of $2,300 billion, a combined population of over 600 million, and an estimated GDP per capita of $3,745. When the AEC comes into being in 2015 these will be strong pull factors for foreign investors. Contrary to growth stories in the US and EU countries, which have become less rosy over time, many ASEAN countries are seeing healthy growth based on economic fundamentals and a sound approach.

There are, however, huge hurdles to overcome. The AEC’s development has been criticised for being slow and some observers have said that the issues that have been delayed are important and could make or break its creation. There’s even been talk of the AEC being put back to 2018. “Non tariff barriers impede businesses but there has been limited progress on this front, yet we have less than two years to go before the AEC comes into being,” observed Mr Dato’ Seri Nazir Razak, Co-Chairman of the ASEAN Business Club. Others believe that the free flow of services, investment and capital will be the most challenging for many ASEAN members, except perhaps Singapore, which has long liberalised foreign investment. This is why, for the majority of the ASEAN member countries, significant amendments in their legal frameworks are required in order to open up markets to ASEAN counterparts.

Benefits to see

With a new economic community around the corner, Vietnam is in a position to reap important economic gains. Under AEC goals, most goods and services traded between ASEAN countries will be taxed at zero per cent, making sales to ASEAN countries similar to domestic sales, reducing import and export times and having more transparent procedures in place. “This is a significant advantage for Vietnam, considering that bilateral trade ties between the country and other ASEAN countries are increasing, with total trade turnover rising from $8.9 billion in 2003 to $40 billion in 2013,” said Ms Pham Thi Hong Thanh, Deputy Director of the Asia-Pacific Market Department under the Ministry of Industry and Trade. “This will provide a major opportunity for Vietnam to improve its trade balance.”

Other benefits relate to foreign direct investment (FDI), as all ASEAN countries will be more important to foreign investors if they are considered one community in a larger regional market. What seems clear is that there is significant interest in the potential of the AEC, and FDI inflows into ASEAN, including Vietnam, will be facilitated due to the region’s favourable investment environment. In the case of Vietnam, the country enjoys distinct advantages that others cannot match. Thailand’s political uncertainty is discouraging potential investors, while the Philippines, despite it’s high GDP growth, is still rated low on the ranking of investment destinations. While many are talking about a rising Myanmar, experienced investors prefer to adopt a wait and see approach.

Besides, observers noted that the AEC is coming at a time when Vietnam is increasingly recognised by ASEAN investors. In 2013, total new and additional registered capital from ASEAN into Vietnam stood at $5.05 billion, accounting for 23.3 per cent of the total. Singapore provided among the largest capital investments, with Lion City being the second-largest foreign investor in Vietnam in 2012 and 2013.

Overall, the benefits of AEC 2015 are clear to see. It is expected to make Vietnam a more attractive investment destination and help the country enhance trade within and beyond ASEAN, generating more jobs and creating wealth for its citizens in the process. For local businesses, AEC 2015 will open up new markets and distribution channels, create more opportunities for the sourcing of goods and raw materials, and stimulate the expansion of production capacity, generating efficiencies.

Remaining obstacles

Much has been said about AEC 2015 and its far-reaching impacts on ASEAN member countries. During the past two years Vietnam has attempted to raise awareness and preparedness in the business community and local people, but planning is far behind where it needs to be. Reports from local media show that the general public still does not have a proper understanding of the AEC and its implications, while the level of understanding among the business community is not much higher.

Because of this lack of understanding, which is shared throughout ASEAN, integrating local small and medium- sized enterprises (SMEs) and supporting them in the initial period of AEC will certainly be a challenge. With some 18 months to go before the AEC comes into effect, Vietnam’s SMEs could lose out on many of the opportunities presented by market integration as they may be hit hard by the high level of competition from investors in other ASEAN member countries. Authorities have conducted seminars to educate SMEs but a lack of understanding persists. At one recent seminar held by MoIT, up to 80 per cent of participating enterprises said that they did not have a proper understanding of what benefits the AEC may bring. “The implementation of free regional trade and investment in the context of AEC 2015 has great effects on local SMEs but many are not fully aware of what is coming,” said Mr Chu Duc Khai, Vice Chairman and General Secretary of the Vietnam Steel Association.

Integration is not without its risks, and one issue that raises much concern is that labour productivity in Vietnam is among the lowest in the Asia-Pacific region and the country is behind most of its major ASEAN neighbours. Research carried out by the International Labour Organisation (ILO) in 2013 revealed that Vietnam’s productivity remains one-fifth the level of Malaysia and two-fifths the level of Thailand. During the five-year period of 2002-2007, Vietnam’s labour productivity increased each year on average by 5.2 per cent, among the fastest in the region. Since the 2008 global economic crisis, however, annual productivity growth in Vietnam has moderated to only 3.3 per cent.

Infrastructure development in Vietnam also represents a challenge, according to Mr Nguyen Duc Thanh, Director of the Vietnam Centre for Economic and Policy Research. “Vietnam has a great need for finance for infrastructure but the percentage of public investment has reduced considerably,” he said. “What the country should do now is to step up the ability to attract finance, to have a regulatory and legal framework to make investors confident to put money into infrastructure projects.” While affordable infrastructure is critical to AEC, Vietnam shouldn’t just think about infrastructure in terms of new infrastructure being built but also the base that already exists.

Last but not least, the large economic development gap between Vietnam and the ASEAN-5 countries (Indonesia, Malaysia, the Philippines, Singapore and Thailand) is an emerging concern in addition to the challenges posed by the global economic slowdown. To be fair, development gaps always exist and local authorities need to find ways to leverage growth opportunities and strengthen competitive advantages to move the country further up the value chain. But the Asian Development Bank (ADB) has pointed out that minimising the development gap will require not only sustained higher economic growth but also policies that close non-income gaps directly. The problem is that these initiatives require time, patience, political will, capital, and a role for the private-sector. Those resources may be beyond the immediate reach of Cambodia, Laos, Myanmar and perhaps Vietnam.

2015 is fast approaching and the AEC is definitely a work in progress. Some ASEAN member countries will move faster and enjoy quicker returns while others will face more challenges. For its part, Vietnam needs to hastily meet the requirements and regulations relating to the establishment of the AEC so that ASEAN will reach its goal of becoming a relatively united institution with harmonised customs and technical levels. Local authorities should also have suitable policies to support local SMEs so that they can take the opportunities and overcome the challenges arising from the establishment of the AEC.

ASEAN Economic Community’s Vision

Free trade in goods

  • Eliminate all tariffs
  • Remove non-tariffs barriers, including subsidies, restrictions, and sensitive industry classifications
  • Create simplified, harmonised, and standardised trade and customs processes and procedures

Free trade in services

  • Facilitate cross-border interactions, subject to domestic regulations
  • Eliminate intra-regional trade restrictions and expand liberalisation in services, especially in financial services, transport, tourism, telecommunications, and professional business services

Free flow of skilled labour

  • Manage mobility limited to only people engaged in trade in goods, services, and investments, subject to domestic regulations
  • Expedite the issuance of work permits and other related documents

Free flow of investment

  • Open up all industries to ASEAN investors with limitations in some sensitive industries
  • Harmonise and streamline investment policies and procedures
  • Increase support among governments

Free flow of capital

  • Strengthen domestic capital markets through better market access and increased market liquidity
  • Create progressive capital account liberalisation and standardise capital market rules and regulations
  • Connect ASEAN’s individual capital markets on a common platform

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