Can Asean really achieve integration by 2025?

Can Asean really achieve integration by 2025?

Covid-19 has posed the biggest test yet for Asean. With weakened fiscal positions and a stark development gap, Asean integration remains uncertain. With five more years left, can the grouping achieve its desired community?

The Covid-19 pandemic has hit Asean member states considerably hard, threatening the region with economic recession. The result so far has been devastating for Asean as millions of people become unemployed, driving household incomes sharply downwards, and gravely impacting consumer spending.

Asean member states (AMS) are now exploring drastic measures to keep the economy afloat, but figures in 2018 show that many AMS have sizeable debts (more than 30%) as a proportion to their GDPs, making them particularly vulnerable to external shocks.

Asean deficits ballooned since the global financial crisis in 2008, during which ultra-low interest rates and quantitative easing (QE) in the United States, European Union and Japan triggered hot money flows into Asean.

This rush of capital fuelled an economic boom, driving property prices and exchange rates sharply upwards. Cheap credit also means unprecedented government borrowing, which culminated in today's fiscal deficits.

Today Asean currencies are depreciating rapidly, and capital outflows are a serious concern. With limited money in public coffers, a damning pandemic and a collapsing private sector, some economists are even suggesting that Asean countries should adopt QE too.

Will this race to the hinterlands of debt ever going to stop? What impact will the incessant printing of money in countries around the world do to the global financial system?

As evident in the US and EU, QE has led to excessively low bond yields, spectacular falls in bank shares and severe income inequality in these countries, the latter of which has led to the rise of populism in Europe and America that we see today.

Income inequality and the development gap within Asean are also worrying trends. Since its founding in 1967, Asean's efforts in creating an economic community has progressed very well on many fronts; tariff barriers coming close to zero through the Asean Trade in Goods Agreement, the 10th and final package of services liberalisation under the Asean Framework Agreement on Services is finally being concluded, and many more.

But Asean is still far from its target. Its non-trade barriers (NTBs) are still a hindrance to intra-regional trade, having spiked from about 2,000 in 2015 to about 9,000 in 2019, and in the absence of a customs union, it is difficult for international investors to treat the region as a single market.

NTBs stem from the need to protect domestic markets against the full heat of free trade.

As Gita Wirjawan, former minister of trade of Indonesia argued in 2015, to open up a country's borders to trade, we need to ascertain whether such opening is detrimental or beneficial to our economy.

For example, in 2015, Indonesia's labour productivity per capita was $20,000 (621,000 baht) on a PPP basis, compared to Malaysia's $50,000 and Singapore's $115,000.

From these numbers alone, we can see the repercussions to Indonesia once the trade gates open fully. This explains why Indonesia is hesitant on full integration despite being one of the founding fathers of Asean and a major proponent of the Asean Economic Community (AEC).

And these are legitimate concerns. Ever since Mexico signed on to the North American Free Trade Agreement (Nafta) with the US and Canada in 1994, it has wiped out family farmers and led to a net loss of 1.9 million jobs in the agricultural sector as a result of competition with the highly subsidised US agricultural industry.

The story of corn in Mexico, a traditional staple of Mexican cuisine, is illustrative. As a result of Nafta, Mexico's multi-coloured corns are replaced by cheaper genetically modified yellow corns from the US flooding the market. The story of Mexico serves as a lesson on unbridled free trade agreements.

The latest Doha Round of the World Trade Organization (WTO) collapsed because of agricultural subsidies from the US and the EU. If the champions of free trade cannot relinquish their subsidies, how can they expect other countries to do the same?

In the context of Asean, we can see why Cambodia, Laos and Myanmar (Vietnam is doing rather well now), Indonesia and the Philippines are still very reluctant to open up their borders.

Can Asean shed protectionism and prevail as a community in 2025? It has a very strong chance and here are four key recommendations:

1. Sunset Law -- Economic nationalism and infant industry protection are similar but vastly different in intent and purpose. Asean countries signed up for economic integration, so their protectionism is time sensitive. Therefore a "Sunset Law" is the best policy to enforce a period or milestone framework on their protected industries.

2. Investment and financial integration -- Since it is in Asean's interests that all countries prosper, investment and financial integration should be the priority, because if the economic destinies of AMS are intertwined, it will give integration a more concerted push. Goods, services and persons will follow suit. Hence the Trading Link must be revived to foster cross-border investments. It is futile to expect the integration of an economic community between countries with different economic destinies.

3. Revitalise Asean swap arrangement (Asa) -- Covid-19 and other pandemics will continue to test Asean's financial resilience. But sole reliance on external arrangements such as the Chiang Mai Initiative Multilateralisation (CMIM) will greatly undermine Asean's financial cooperation. The grouping should revitalise its Asa considering its combined international reserves position of more than $900 billion. At least $50 billion can be used to set up an emergency fund for Covid-19. QE should always be seen as a last resort when all else fails.

4. Development over integration -- Rather than focus solely on textbook economic integration, Asean should focus instead on facilitating the development roadmaps for each AMS. Thus, the Asean secretariat can assist AMS to shift their attention inwards into improving their policies and structures, before reaching outwards for integration.


Fazil Irwan Som is Executive Director of the International Strategy Institute with a deep interest in Asean integration. He has a Masters in Southeast Asian Studies from SOAS London and was involved in Asean integration work during his tenure at the Institute of Strategic and International Studies (ISIS) Malaysia. The views are his own and do not represent any organisation.


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