Sep 25, 2023
The Association of Southeast Asian Nations (ASEAN) aims to create a highly integrated regional economy by 2025. Known as the ASEAN Economic Community (AEC), the initiative faces many obstacles that may hinder the achieving of its goal.
To help explain the obstacles, and the opportunities, we are joined by Dr Denis Hew. Currently Senior Research Fellow at the Centre on Asia and Globalisation, Lee Kuan Yew School of Public Policy, Dr Hew has served as Director of the Asia-Pacific Economic Cooperation Policy Support Unit. He also spent time managing technical assistance programmes on regional cooperation and integration at the Asian Development Bank. Dr Hew has published extensively on policy issues related to economic integration in ASEAN and the Asia-Pacific region.
David Austin: Thank you, Dr Hew, for joining us. I'm really excited to hear what you have to say today. And I was wondering if you could please start by just briefly describing what is the plan for the AEC and when did it begin?
Denis Hew: Thanks, David. So, the ASEAN Economic Community is envisioned to be a highly integrated and inclusive regional economy by the year 2025, and this would require a very high degree of economic integration among its ten member states. This project was launched way back in 2003 during the ASEAN Summit in Bali, Indonesia, and references to the AEC in that document would suggest that the end goal is to realise a kind of a Europe-style common market. If you look at the wordings that's in that document, it sort of connotes that. It talks about the single market and production base with free flows of goods, services, investments and skilled labour.
It seems like ASEAN is biting a bit more than it can chew in that sense. But it's not really starting from scratch. There are building blocks, particularly economic agreements that they've signed and have implemented over many years. And that includes things like the ASEAN Trade in Goods agreement, the ASEAN Comprehensive Investment Agreement, as well as the ASEAN Trade in Services Agreement. And also, as you know, ASEAN has many different types of free trade agreements with its major trading partners, what we call the ASEAN Plus One FTAs.
And more recently it's got this mega regional trade agreement called RCEP, the Regional Comprehensive Economic Partnership with its five major trading partners, RCEP for short. And that was put in force on the 1st of January last year.
David Austin: But what challenges have presented themselves so far in realising the full vision of the AEC?
Denis Hew: There is a blueprint that the ASEAN Economic Community has. It's currently in its second version. It's for 10 years, 2016 to 2025. And there was a mid-term review that was done on that, but it does mention that it's completed about 50, 54 per cent of those initiatives in that blueprint.
Unfortunately, the timing's really bad because that mid-term review coincided with the year 2020. I mean, we saw that, particularly by the first quarter of that year, the beginning of the COVID-19 pandemic. And that's resulted in a lot of setbacks in terms of implementation, because we've got border controls, we had restrictions of movement, lockdowns, supply chain disruptions. And so that set back, unfortunately, a lot of those various types of important initiatives in the AEC blueprint.
And so, in that sense, I think there's going to be a lot of unfinished work by the time it reaches 2025.
David Austin: So, the 2025 deadline is a bit unrealistic, but do you have a sense of how close they'll be to the blueprint ideal by 2025?
Denis Hew: Well, it depends on who you're talking to. Because in a way, whether you can realise the AEC by 2025 will depend on whether you see it as a final end goal or is it just a journey?
Because if you talk to some ASEAN policymakers, they'll tell you it's a journey, right? It's you know, we were getting there. We've achieved a lot of things, but there's still work to be done. In some sense, in my personal view, it's kind of a very convenient way of kind of moving the goalposts. So, I think what's more important is to see what couldn't be achieved because of these setbacks in the pandemic. But also, what's important is areas which were not captured in the original blueprint. For example, we know that over the last couple of years there's been a massive acceleration in terms of digital transformation. A lot of companies, because of shortage of labour, are beginning to adopt different kinds of whether it's AI or different kinds of digital technologies to help to keep their businesses afloat.
But that leads to all sorts of challenges. For example, as it's mentioned in many literature, it can create job polarisation because if more companies adopt different kinds of digital technologies, then they don't need so many workers anymore, right? And that could happen. So basically, any jobs, which are very repetitive in nature, that's a very high likelihood in many industries that these workers will lose their jobs to either robots or AI.
So that needs to be addressed. The other thing, of course, is that in many ways the global economy is changing because of these different types of technologies. And I think that's a key importance to reskill workers because they've lost their jobs or have been displaced by these technologies need to be reskilled. And we know that many governments, including in ASEAN, where that's been happening.
I think another important point to point out is that during the pandemic, it affected different parts of the population differently. We know that, for example, women had to exit the labour market in many countries earlier than their male counterparts, because in many developing countries, they take a bigger role in terms of household chores, online education, and kids have had to do online learning. So, I think it's also important as we move forward in the post-COVID period to ensure that we can reduce this kind of inequality that may happen. Many women who have left the labour market are still not back in the labour market because of different kinds of adoption of technologies.
There's also been a digital divide, which I think has widened over the past couple of years because of the pandemic. Countries, particularly in ASEAN that don't have good enough digital infrastructure, this has affected particularly students and young people because they don't have the opportunity to go back to school or do online training. So, there's missed job opportunities for them.
So, there's also concerns about reskilling and also ensuring that young people are able to get the kind of skills that they need for the new kinds of industry that's happening. So that inequality extends to this wide digital divide that we see here. And there's a lot that ASEAN needs to do in going beyond 2025.
David Austin: You mentioned that it can be seen as a journey, but is there going to be a next AEC blueprint for what are the goals after 2025? Is that in the works right now?
Denis Hew: Definitely. If you talk to some of the some of the policymakers or officials that they're already working on right now and they're trying to get ideas from different institutions, think tanks on what should be put in that next blueprint. And even myself and some of my colleagues, we've written a lot of papers trying to give ideas on what we should be doing.
I think one of the important things is to address some of the emerging challenges that's going to happen in the next decade or so. And that needs to be translated into concrete policies and actions in the blueprint. I talked about digital connectivity, that is one. The other area, of course, is productivity. If you look at the level of productivity, particularly if you measure it by what we call total factor productivity, which measures innovation and technological progress, it's non-existent over the last 10 years in the ASEAN region.
So that means that there needs to be a lot more investment in R&D and in promoting innovation in the region so that they can achieve much more sustainable economic growth. So that's something that we've been encouraging that should find its way in the next blueprint, whether it's 2035 or whatever, most likely in the next 10 years.
David Austin: And what do you foresee as being the key opportunities and challenges in that post-2025 world?
Denis Hew: In terms of opportunities, there's a common purpose, right? I mean, we've all been through the pandemic. Most of our economies have been battered. And there's a great opportunity for all ASEAN member states to work together, to rebuild their economies, to build resilience in their economies. I mentioned about free trade agreements. Right now, there's been a lot of upgrading by different dialogue partners with ASEAN on their free trade agreements.
And then, of course, we've got a very large FTA called RCEP. So that would help to revitalise the global value chains and supply chains that we have in the region. We also know that a lot of multinationals are kind of relooking and finding ways to mitigate future supply chain shocks and disruptions, the often-talked-about term is the China Plus One strategy.
So not putting all the investments in China and trying to find ways to diversify some of the risks and investments elsewhere. And of course, ASEAN through the AEC, is a major beneficiary. So, if they are able to work together in strengthening their industries, industrial linkages, strengthening connectivity, then you might begin to see a lot of that foreign direct investments and supply chains being revitalised. We will eventually become the one of the major beneficiaries from that disruption and reconfiguration of global value chains.
I think one of the main concerns is that, well, we're looking ahead to very uncertain times. The global economy is slowing down. We've got very slow progress in terms of some of the major engines of growth like China and the US picking up their economies. We've got downside risk concerns of high inflation. We've got concerns with the war in Ukraine that's raised prices of fuel as well as energy. So, a lot of concerns that have an impact on investments and on economic growth and trade growth.
So, one of the biggest challenges I think that you might find that as we move ahead, domestic priorities might override regional ones. So, the concerns of helping domestic constituents, if you want to even call that, becomes more important than looking at the AEC. And I think that's, strategically, I think that's very worrying to see that happening.
I think the other major challenges to look at is that many of the economies in ASEAN are middle income economies. So, as I mentioned, we need to look at strengthening R&D and technology and innovation. Otherwise, one of the big concerns is that we'll end up in the middle-income trap. We're not able to move up to the next level in terms of technology and we're always going to have very stagnant flat growth as we move forward. And it's sort of reinforced by the fact that there are a number of economies that also suffer from an ageing populations, including Singapore and Thailand. You're facing a shrinking labour force because of an ageing population that also poses a major challenge that needs to be addressed by investing in new drivers of growth like the services industry.
So, we talked a lot about trade in goods, but the services industry, particularly digital services, there's a lot of untapped potential there. And I think these are some of the challenges that ASEAN needs to do and that should be put in that next AEC blueprint for the next ten years.
David Austin: You mentioned that the AEC was announced at the 2003 Summit. From that 2003 point to now, how would you say that it has improved the economies of the different ASEAN nations?
Denis Hew: You can see that. I mean, increasing over the last 20 years. ASEAN is more integrated now than it was back then, and you can see that in terms of what they're exporting to each other. You can see that over the last 20 years there's been an increase in terms of intra-regional trade of industrial goods, parts and components.
So increasingly, you're seeing many of these economies industrialising and that being part of a much bigger global value chain that not just includes ASEAN, but China and other major economies. We know that, particularly if you look at, say the electronics industries, there are many ASEAN countries that have become very specialised in making parts and components for exports to China to make the final products. You know, whether it's your smartphone or various kinds of consumer electronic products. So, we see that happening. You see that change.
And you can also see in terms of the foreign direct investments are flowing into the ASEAN region. In the past, maybe much of that investment was in much more, sort of raw materials and mining sector.
But increasingly, we see investments from multinational electronic companies and we can see that — if you go to Singapore, to Malaysia — you see big companies like Intel building up their semiconductor factories. And in Thailand's case, of course, it's become a major hub for the automobile sector, for you see very big multinationals like Honda, Toyota all building up a lot of those, the production networks in this part of the world.
So, you do see that major change. And of course, you can see that change also in living standards. And in terms of capital, if you look at the income growth and GDP and GDP per income per population in many of the ASEAN countries that they've grown very significantly over the last 20 years. Except that I think, and this is something I always bring up, is that policymakers need to take economic convergence a bit more seriously because some countries are getting richer and faster than others.
And I think economic integration should benefit all economies and not just one or two. So, I think they need to find a way to look at different kinds of initiatives that would help to narrow that development gap between them. There is something called the Initiative for ASEAN Integration (IAI). That's an ASEAN initiative to narrow the development gap. Unfortunately, it's not been very effective. I mean, we've had this for the last 10 or 15 years and the kinds of programmes that they have are not, I would say, they are not enough or that they're not effective enough to meet the challenges that we have today, including things like courses in digital skills, financial skills. These are some of the things that need to be put in this initiative if they want to make it effective.
So, I think some of these things need to be, there's still a lot of work to be done, to be honest. But having said that, in the last 20 years you've seen a lot of economic progress.
David Austin: And you mentioned the digital divide. Do any of these initiatives address digital infrastructure in perhaps the less developed countries? Is that being addressed at all?
Denis Hew: It's being addressed ASEAN-wide rather than just among the developing member states of ASEAN. For example, there is something called the Digital Economy Framework Agreement, DEFA, which ASEAN has just announced that it will start negotiations and plan to complete that by 2025. So, in terms of other things that need to be accomplished by 2025, if they're able to do that, I think that's quite a major achievement. Because of the digital economy, looking at issues like digital trade barriers, like cross-border data flows, these are being discussed right now, not just in ASEAN, but also at the WTO and elsewhere.
So, if they're able to come up with a framework that they can work together to promote digital economy, digital trade, e-commerce, I think that's a major accomplishment, if they can do that in the next two years.
Another interesting development that they've done is they're trying to work together in terms of coming out with a sort of a QR payment system where different ASEAN countries will be able to go to neighbouring countries and just pay using their mobile phones. So, they call this the QR Code Payment Network system, and that's currently being developed by all the ASEAN countries. And I think that would definitely strengthen financial connectivity among its member states and of course strengthening digital connectivity, I mean, there's definitely the developing countries like Cambodia, Laos, would tend to benefit the most if they can strengthen that working together as a region is one thing, but if they are able to just improve their infrastructure and in terms of broadband, that that's that has a tremendous impact in helping small-medium enterprises in these countries.
It's kind of a buzzword now, everyone talks about digital trade, but I think it really needs to sit down together and address one of the key barriers and try to bring that down, if they want more e-commerce and digital trade to happen.
David Austin: Is there anything else that we haven't talked about that you would like to mention?
Denis Hew: Maybe the one area I talked about was connectivity. So, you’ve got the AEC blueprint right? But connectivity is done separately through what they call the Master Plan on ASEAN Connectivity. But in many ways, these two things are really connected. If you want to have closer economic integration, you need to strengthen regional connectivity. So, the master plan for ASEAN connectivity has three main components.
It's the physical part, which is the infrastructure development that they have. I think institutional connectivity, which looks at things like trade facilitation, making it easier for goods to go across borders, in helping with customs and so forth. And the third one is people-to-people, make it easier for people to move across borders.
But right now, it's being done by two separate committees. So, I think there needs to be better coordination between the government officials who are working on the AEC, who are mainly in trade or in economic ministries, and with connectivity a lot of them are from the transport ministries, but also other types of ministries. So, I think within ASEAN, I think they need to find a way for them to work closer together so that there's better coordination if they want the AEC to succeed.
I think the other area probably that we need to look at is institutional reforms. If you want to be more integrated, for sure, there's going to be a lot more trade disputes among the member economies, member states. And I think the ASEAN dispute settlement mechanism needs to be made more workable. Right now, there is a dispute settlement mechanism and I think it's 20 years old. I mean, that mechanism has been in place since they talk about the ASEAN Economic Community, but no one has used it.
So, I think it's important with the number of trade disputes going up and also with concerns with the WTO, because the WTO has its own problems in trying to do the necessary institutional reforms, we need to make the ASEAN dispute settlement mechanism workable. I think that's something that policymakers need to look at.
And of course, the ASEAN Secretariat themselves, I think you mentioned about tracking the progress of the economic community. The Secretariat plays a very big role in doing that, but they're under-resourced and they need more technical people. They need more expertise. So, I think there's a need to devote more resources and to empower the Secretariat to be able to monitor, to even enforce some of these initiatives and economic agreements if they want the AEC to really succeed this time.
David Austin: Overall, though, are you optimistic about the future of the AEC?
Denis Hew: I guess I'm more optimistic than pessimistic. That's how I would say it.
ASEAN has a compelling story. We're not the European Union. We're not like the European Union, but there is economic integration going on. And they've been at it for the last 20 or so years. So, I think it's a very attractive place for foreign investment.
And if you look at the kind of intra-regional trade, everyone complains that it's only about 20 per cent. It's been 20 per cent for a long time. That's what they trade among themselves. But if you look at what they're trading, and their trading with their major trading partners, whether it's the European Union, Japan, China, it's been growing. So, I think it's a very dynamic region.
The key issue is that it shouldn't be business as usual. And I think a lot of government officials like to kick the can when it comes to all these challenges. And what they need to do is to address these challenges head on. And they need to do it now because all our economies are recovering, and economic growth is slow.
This is a time for us to work together and not to just focus on domestic or national interests. It's easier said than done, of course.
David Austin: I think that's a good sentiment to end it on. Thank you so much for sharing your expertise with us. It has been very educational and enjoyable.
Denis Hew: Thank you, David.