Published on Asia Times on 24 June 2004.

Under one ASEAN - an impossible dream
By Gary LaMoshi

DENPASAR, Bali - When leaders of the Association of Southeast Asian Nations (ASEAN) meet in Jakarta next week, they’ll have two big ideas making the rounds in their minds. One is greater integration between the 10 ASEAN member states. The other is the region’s competition with China for investment, jobs and export opportunities.

A recently published study from consultants McKinsey & Company combines these two ideas into a prescription for ASEAN to recapture its economic vigor. The study says that ASEAN is losing its competitive edge to China (and India) and recommends closer integration of the ASEAN member states as a cure.

Research for the paper was completed before the 2003 ASEAN Summit in Bali, where leaders endorsed creating a European Union-style single market by 2020 (See Asia’s summit season: Just alphabet soup, October 24, 2003). That summit also featured a challenge from Chinese Premier Wen Jiabao for ASEAN to boost trade with the Middle Kingdom.

On Monday, Malaysia’s Prime Minister Abdullah Ahmad Badawi combined the two ideas, suggesting that ASEAN and China, plus Japan and South Korea, form a greater East Asian Community. “We have dallied long enough,” Badawi declared.

The region’s other leaders seem to agree that these twin pillars - closing ranks with each other and with China - are the right prescription for ASEAN. But the building blocks rest on a faulty assumption and an impossible dream.

China syndrome
The faulty assumption is that China and ASEAN compete the way companies do, where one side wins and others lose. When it comes to foreign direct investment (FDI) for manufacturing plants and other infrastructure, countries do compete for a limited pool of dollars, yen or euros. But, as China demonstrates, even winners need friends.

While China chalks up a massive trade surplus with the US, it runs a trade deficit with ASEAN, importing everything from Indonesian gas to electronic components from Thailand, Malaysia and Singapore. China’s call for increased trade with ASEAN is a plea to keep fuel flowing to its burgeoning industrial machine. China’s recent attempts to throttle back its explosive growth won’t reverse the trend.

But while ASEAN may lose the headline battle for FDI, it directly benefits from those investments in China. Even in today’s globalized world that supposedly conquers distance, ASEAN gains much more from investments in China than it would if those investments went to Mexico or Poland. So it’s in ASEAN’s interest to work with China to keep foreign investment streaming into the region, no matter which country it lands in. Competition between FDI contenders needs to be leavened with understanding of the regional benefits.

Dream team
An ASEAN Economic Community (AEC) able to compete with China is the impossible dream in this vision. And a tempting dream it is: 560 million people with consumer spending of US$330 billion, equivalent to China’s wealthy coastal provinces. A single market would also allow the consolidation of operations in different countries to achieve greater economies of scale and greater profits.

On the export side, the McKinsey research estimates that integration would cut the cost of electronics production by 10-20%. Consumer goods manufacturers and other companies could also cut costs by up to 20% thanks to simplified border crossings, single production runs for items such as hand soap and reduced working capital requirements due to streamlined inventories.

Despite the obvious advantages of greater integration, few ASEAN governments are willing to make the tough decisions required. This lack of political will points to the easy way out on other issues, too, such as corruption, equal opportunity in education and labor laws. It’s simpler to pander to entrenched interests or, at the other end of the spectrum, to keep behaving autocratically, than it is to reform or to surrender even a slice of sovereignty to strengthen ASEAN.

While ASEAN leaders at the 2003 summit declared they would take the next step toward an AEC by 2020, they still haven’t closed the previous chapter. Creation of the ASEAN Free Trade Area (AFTA) has been fraught with delays and difficulties. Tariffs still haven’t disappeared and certain sectors remain protected.

Odd coupling
ASEAN’s 10 member countries simply aren’t for real integration. The group includes underdeveloped microeconomies Laos and Cambodia, wealthy microeconomies Singapore and Brunei, pariah state Burma and communist Vietnam. The challenges of integration go far beyond bridging per capita income gaps and the possibly painful adjustment period ahead.

Moreover, no ASEAN leader has articulated the advantages of integration convincingly to the population. There’s no public hint of even a broad blueprint for the AEC. A serious plan for integration would require beefing up ASEAN institutions; if form holds, that would inspire a bitter row over where these enlarged institutions would be headquartered as well as who’d work in them before they got down to making any real changes.

Creating a single market would also shut down popular avenues for corruption, such as customs. But the legal issue is more fundamental. An ASEAN single market would require a readiness to follow rules. If national authorities have failed to convince citizens that rules apply across the board - yes, even to you - it’s unlikely that some remote regional institution can manage it.

Fortunately, ASEAN doesn’t need to go all the way to the AEC to coexist profitably with China’s economic explosion and resume its pre-crisis growth curve. The bad news is that virtually every ASEAN country must undertake major internal reforms to succeed with its ASEAN colleagues, China or the world at large. Those changes don’t require new institutions or a vision that overcomes ASEAN’s vast economic differences and nationalist impulses. But few member states have shown the political will to dare take even baby steps in that direction.

(Copyright 2004 Asia Times Online Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)

  

Posted on June 25th, 2004 by jl
Filed under: Regionalisation