It is supposed to be a new dawn in Southeast Asia, but the reality on the ground feels otherwise. The Asean Economic Community -- with its three integrative pillars of political and security, economic and socio-cultural -- is much less than meets the eye on paper. Asean integration is still a pipe-dream, an ongoing project in fits and starts that has a canny way of projecting more than it delivers.
But Asean integration is not doomed. Its future lies less in the inter-governmental hands of Asean states and more through the dynamics and thrust of expanding global value chains (GVCs) that now crisscross Asean markets. Asean governments should facilitate, enable and promote their firms to engage in GVCs as much as possible without getting in the way. Indeed, GVCs have shaped up to be the linchpin and locomotion of Asean economic integration.
Approaching 49, Asean has gone through different phases of economic development, starting from the early post-war industrialisation that peaked in the late 1980s. While the 1997 financial crisis brought growth to a halt, it led to reforms and adjustments that were beneficial to Asean members, as firms and governments adopted more financial discipline and prudential measures. Post-crisis reforms enabled Asean to maintain a steady growth trajectory of 5% for the past decade, a trend that is expected to continue until 2020. The region remains an important part of the growth engine in emerging Asia in addition to China and India, especially in view of China's economic slowdown.
Despite some ups and downs, Asean's overall performance in the past four decades has been well above the world average. If Asean were one economy, it would be the seventh largest in the world with a combined gross domestic product of more than US$2.5 trillion (90 trillion baht) in 2015.
Labourers work at a garment factory in Vietnam. Garment makers are slowly moving their production bases to Vietnam to lower labour costs, thereby helping to strengthen Asean economic integration. (Reuters photo)
Broadly speaking, this performance can be attributed to the region's ability to benefit from export-led economic development policies that centre on attracting foreign direct investment (FDI) from more advanced economies looking for alternative production locations. Given their lower costs, sufficient infrastructure, and relatively stable social and political environments, Asean countries became attractive choices for many multinational enterprises (MNEs) to set up production facilities and export final products.
Advances in transportation and telecommunication technologies allowed MNEs to geographically distribute their activities to locations that offered the best advantages for each type of activity. Put simply, the value chain of industries -- ie, the range of activities that bring a product from its inception to end use -- no longer needs to be contained in just one location and under the control of one firm. This phenomenon gives rise to what is now known as the "global value chain" -- whereby these activities are divided among firms in different geographic space, and coordinated by "lead firms" which are typically advanced-economy multinational enterprises.
Developing economies, such as those of Asean, are integrated in GVCs as production and export bases, while multinational lead firms relocate their standardised and more labour-intensive functions offshore to benefit from lower costs. On the contrary, more sophisticated and higher value activities, like R&D or sales and marketing, are kept in developed countries owing to the broader availability of skilled resources and proximity to demands.
This model was a win-win for all. Consumers in advanced economies can buy products at cheaper prices, while MNEs from those countries can maintain their cost competitiveness. Emerging-market firms benefited from being part of the GVC and their countries gained from inward FDI flows and subsequent spillovers. Asean's integration schemes over the years were not a priority because firms and governments in member countries looked toward the end markets beyond the region. No wonder past schemes of Asean economic integration attempts moved ahead at a snail's pace, if at all.
This scenario changed when the centre of economic gravity shifted towards emerging Asia in the past decade. Squeezed between the two giant economies of China and India, Asean realised the region could be on its way to irrelevance if it did not get its act together. With over 625 million people, Asean's combined market is next to that of China and India, and the region has the world's third largest pool of labour that is relatively young.
While Asean member states continue with their layers of numerous meetings, the real challenge for a meaningful Asean integration lies in how activities in GVCs could be broadened and deepened, and how regional firms and economies can become more actively involved in existing and new GVCs.
The broadening of GVC activities means more functions along the value chain should now take place within Asean. The region should aspire to evolve beyond the manufacturing base for the West and to become a fully integrated single market, in which the entire range of GVC functions can take place within the region. Firms and governments need to focus on creating and attracting higher value-adding activities from sales, marketing, and brand-name building to the more knowledge-intensive activities of R&D. An example could be Thai firms that have focused mainly on the domestic market can consider expanding their sales, distribution channels and marketing activities in other Asean countries.
Similarly, Asean should also consider how the region could deepen GVC activities within the region by encouraging firms to penetrate deeper into Asean through relocating some activities that may no longer be economically viable in their home economies to alternative locations.
The relocation of garment factories from Thailand to Cambodia, for example, shows how garment production could deepen within the region.
The broadening and deepening of GVC activities within Asean would compel firms and governments to view regional economic integration in a more realistic light. Analysing where firms and economies fit in along the value chain of industries should enable better-informed strategic planning in boardrooms as well as government offices.
It is through this holistic and integrative analysis of how things stand on the ground that Asean corporates and governments can come up with effective policies that would further bolster the foundation of economic activities that have already spanned the region through global value chains.
Pavida Pananond is associate professor of International Business at Thammasat Business School, Thammasat University.