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Ongoing process

Released at: 08:47, 15/10/2014 AEC 2015

Ongoing process

Senior Researcher Dr. Ponciano S, Intal, Jr. from the Indonesia-heaquartered Economic Research Institute for ASEAN and East Asia (ERIA) discussed the ASEAN Economic Community with VET's Ha Anh.

by Ha Anh

From ERIA’s perspective, have all ASEAN governments and enterprises paid sufficient attention to the establishment of the ASEAN Economic Community (AEC)?

On a superficial level, more and more ASEAN enterprises are aware of the AEC. There are both concerns, especially among SMEs, as well as interest about the opportunities of a large and more integrated market.

Dr. Ponciano S, Intal, Jr.

On a deeper level, however, there is always a continuing challenge about whether indeed ASEAN enterprises and even governments have paid enough attention to what the establishment of the AEC entails. This is because the AEC, as is implied by the AEC Blueprint, demands so many major policy and institutional changes in ASEAN member states in order to have a well-performing regional economic community. Thus, for example, a well-performing AEC entails investment and services liberalisation, efficient customs and single windows for seamless trade facilitation, facilitative standards and conformance regimes, non-protective non-tariff measures, greater mobility of skilled labour and professional services, much improved physical connectivity, including air and maritime, more coordinated implementation of competition policy and intellectual property rights protection, and so much more. Most of these measures require a lot of time, resources, coordination, and political will for effective implementation.

Moreover, the challenge of engendering a well-performing economic community is a continuing one because of dynamic changes in the wider Asia Pacific region and the international economy. Given the above, it is clear that ASEAN enterprises need to pay more attention to the establishment of the AEC. Indeed, the success of the AEC depends very much on the greater engagement of ASEAN’s private business sector in the process of policy and institutional changes at both the national and regional levels, as well as on the active adjustment that ASEAN enterprises undertake to meet the challenges of a much more open and integrated ASEAN market and economy.

How does ERIA view the benefits of the AEC for member countries?

The results of simulations undertaken by ERIA using the GTAP model shows that all members are eventual net beneficiaries of the elimination of tariffs, significant reductions in services, trade and non-tariff barriers, and major improvements in trade facilitation; see figure below. The simulation results also show that deepening economic integration with the larger East Asia region will lead to even greater net benefits to all ASEAN countries than from the AEC itself; see figure below.

This is because most ASEAN countries trade more with the larger East Asia region than with other members. Note though that the simulation results show “end period” results and do not indicate the adjustment during the transition. There may be such adjustment challenges. Nonetheless, the simulation results suggest that if the adjustment process in the transition is well managed, member states will be net beneficiaries from the integration efforts within ASEAN and within broader East Asia. Note that Vietnam is comparatively a greater net beneficiary than many of member states.

What are the real challenges from the AEC for developing economies in ASEAN like Vietnam, Cambodia and Laos? Which of their business sectors will be vulnerable once the AEC takes shape?

It is useful to differentiate the challenges for governments from the challenges for the business sector. As I imply in my answer above, the real challenge for ASEAN governments, including Vietnam, Cambodia and Laos, is whether they have the institutional capacity and political capital to undertake all the necessary policy reforms and institutional development measures to have a well-performing AEC. In many ways the implementation of the AEC is a concerted policy reform and institutional development among member states.

As for the private business sector, being proactive in helping the government in developing the appropriate policies and institutions in light of the AEC is very useful. Adjusting to the challenges as well as the opportunities of the AEC is imperative for every firm if it wants to grow under the AEC. It must be emphasised, however, that given the policy reforms and institutional improvements demanded by the AEC, and therefore, a much improved policy regime engendered by the AEC, the overall investment climate can be expected to improve, thereby raising investments and potentially economic growth and resulting in more robust markets for firms that undertake the appropriate adjustments.

An open and more integrated ASEAN economic community results in member states playing more to their respective comparative advantages. In a robustly growing economy, “vulnerability” becomes a relative term in terms of growth prospects, and does not necessarily imply the death of a sector. That is, in a growing economy, firms die but industries adjust. The overriding challenge is the effective management nationally of the adjustment challenge. Thus, if managed well, there will be faster growing industries where a country has strong comparative advantage and slower growing industries where the country has far less comparative advantage. It can be expected that only egregiously inefficient firms and extremely protected industries can be expected to face serious challenges of survival under a regime of economic openness and robust economic growth. Of course, there will be (mainly small) firms that die and (mainly small) new firms, but this is part and parcel of industrial churning in any robustly-growing economy.

Do you think some of the larger neighbouring economies like China, Japan, and South Korea are paying much attention to the establishment of AEC by 2015? How will they benefit from the AEC?

They are paying attention to the establishment of AEC, not necessarily by 2015 per se because, as indicated earlier, the building of a well-performing AEC does not stop in 2015. They pay attention because ASEAN is a large market with a middle class larger than India and is growing. They also pay attention because ASEAN is very much part of regional production networks and is even growing parts of these networks. This expansion is best exemplified by the dramatic rise of Vietnam in the electrical and electronic equipment production network in recent years, as the huge investments by the likes of Samsung and Intel take root in the country. Even Chinese firms are now relocating to Vietnam, Cambodia and Laos.

What should enterprises and government in developing ASEAN countries like Vietnam do to be fully-prepared for the AEC by 2015?

My answers above are relevant here. Much wider and deeper dissemination on AEC by 2015 and beyond and what the AEC really entails with all the various stakeholders in the country is also very important. As indicated earlier, preparing for and adjusting to the demands of the AEC is not a one-off thing but rather a continuing effort as the AEC evolves over time, in tandem with the evolving East Asia and global economy.

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