Southeast Asia Economic Community? Around the Corner of or Another 10 Years Work in Progress?

From macro to micro levels, is ASEAN’s AEC a failure? Latest thinking is that “No, ASEAN’s AEC is not a failure” but ASEAN’s AEC is a “Much Longer-Term Work in Progress.” Some now says, ASEAN AEC will be acheivable, 10 years from now, while other says 15 to 20 years, into the future.

ASEAN’s 10 member economies, comprising Brunei, Cambodia, Laos, Indonesia, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam,, encompassing more than 620 million people.

The ASEAN Economic Community (AEC) aims to transform ASEAN into a region with “free movement of goods, services, investment, skilled labor and freer flow of capital,” based on four key pillars of a single market and production base, a highly competitive economic region, equitable economic development and full integration into the global economy.
Yet after first being proposed in 2007 as part of the ASEAN Vision 2020, the deadline for the AEC was moved from January 1, 2015 to December 31, 2015, with observers now reportedly eyeing a “post-2015 agenda,” despite official reassurances. In November 2014, ASEAN reported that “good progress” had been made across approximately 88 percent of three pillars of the AEC. However, business has shown skepticism, with respondents to a survey of U.S. businesses in the region expressing doubts whether the AEC’s goals would be achieved even by 2020.

According to the “ASEAN Business Outlook Survey 2015,” just 4 percent of respondents considered it likely that the organization would achieve the AEC goals by the end-2015 deadline, down from 23 percent in the corresponding survey the previous year.Nevertheless, 66 percent of respondents said ASEAN markets would become more important to their companies’ global revenues over the next two years, with 89 percent forecasting increased trade and investment over the coming five years.

Asian Development Bank View (source):

According to the Asian Development Bank’s Jayant Menon, ASEAN has made the greatest progress in tariff reduction, with more than 70 percent of intra-ASEAN trade now incurring zero tariffs under the ASEAN Free Trade Area. According to ASEAN, average tariff rates on intra-ASEAN imports have declined from nearly 3 percent in 2003 to 0.5 percent in 2014.
However, gaps remain between the region’s larger and smaller economies in areas such as trade facilitation and investment liberalization, while services trade has proved harder to liberalize. Menon also cited problems in protecting intellectual property rights as well as reducing development disparities between the region’s rich and poor, although progress with the fourth pillar has seen the rise of “Factory ASEAN.”

“Accommodating AEC accords will not be easy when they require changes to domestic laws or even the national constitution. The flexibility that characterizes ASEAN cooperation, the celebrated ‘ASEAN way’, may hand member states a convenient pretext for non-compliance,” he warned in East Asia Forum.

“If the AEC is to be more than a display of political solidarity, ASEAN must find a way to give the commitments more teeth. The 2015 deadline should be viewed not as the final destination but as a milestone on the slow and long journey towards the AEC.”

Highlighting the region’s economic divide, both Brunei and Singapore had GDP per capita exceeding $35,000 in 2013, while Indonesia, Malaysia, the Philippines and Thailand ranged from $2,700 to $10,400.

ASEAN Countries Political Super-Structure:

The Problems (source)

All reliable indicators suggest that ASEAN’s (Association of Southeast Asian Nations) Economic Community (AEC) will not be successfully established by its 2015 deadline. Why? Against technocratic, realist and constructivist accounts, ASEAN’s AEC integration problems are rooted in the political economy of ASEAN’s member-states. Economic liberalisation agreements promote the rescaling of economic governance, involving regulatory changes that may radically redistribute power and resources. Consequently, they are heavily contested between coalitions of social and political forces, without outcomes reflecting the outcome of these struggles. The argument is demonstrated by exploring the uneven sectoral liberalisation achieved under the AEC, the constrained integration of ASEAN’s energy markets, and the limited deregulation of skilled labour migration.

The Big Picture:

What is the Goal of ASEAN’s AEC?

Economic integration is the unification of economic policies between different states through the partial or full abolition of tariff and non-tariff restrictions on trade taking place among them prior to their integration. This is meant in turn to lead to lower prices for distributors and consumers with the goal of increasing the level of welfare, while leading to and increase of economic productivity of the states.

The trade stimulation effects intended by means of economic integration are part of the contemporary economic Theory of the Second Best: where, in theory, the best option is free trade, with free competition and no trade barriers whatsoever. Free trade is treated as an idealistic option, and although realized within certain developed states, economic integration has been thought of as the “second best” option for global trade where barriers to full free trade exist.

In economics the word integration was first employed in industrial organisation to refer to combinations of business firms through economic agreements, cartels, concerns, trusts, and mergers—horizontal integration referring to combinations of competitors, vertical integration to combinations of suppliers with customers. In the current sense of combining separate economies into larger economic regions, the use of the word integration can be traced to the 1930s and 1940s.

There are economic as well as political reasons why nations pursue economic integration. The economic rationale for the increase of trade between member states of economic unions that it is meant to lead to higher productivity. This is one of the reasons for the global scale development of economic integration, a phenomenon now realized in continental economic blocks such as ASEAN, NAFTA, SACN, the European Union, and the Eurasian Economic Community; and proposed for intercontinental economic blocks, such as the Comprehensive Economic Partnership for East Asia and the Transatlantic Free Trade Area.

Comparative advantage refers to the ability of a person or a country to produce a particular good or service at a lower marginal and opportunity cost over another. Comparative advantage was first described by David Ricardo who explained it in his 1817 book On the Principles of Political Economy and Taxation in an example involving England and Portugal.
In Portugal it is possible to produce both wine and cloth with less labour than it would take to produce the same quantities in England. However the relative costs of producing those two goods are different in the two countries. In England it is very hard to produce wine, and only moderately difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine, and trade that for English cloth. Conversely England benefits from this trade because its cost for producing cloth has not changed but it can now get wine at a lower price, closer to the cost of cloth. The conclusion drawn is that each country can gain by specializing in the good where it has comparative advantage, and trading that good for the other.

Economies of scale refers to the cost advantages that an enterprise obtains due to expansion. There are factors that cause a producer’s average cost per unit to fall as the scale of output is increased. Economies of scale is a long run concept and refers to reductions in unit cost as the size of a facility and the usage levels of other inputs increase. Economies of scale is also a justification for economic integration, since some economies of scale may require a larger market than is possible within a particular country — for example, it would not be efficient for Liechtenstein to have its own car maker, if they would only sell to their local market. A lone car maker may be profitable, however, if they export cars to global markets in addition to selling to the local market.

The Micro Picture at ASEAN’s AEC:

Success Factors for Integrating Suppliers into New Product Development

Faster, better, cheaper (source) — these marching orders summarize the challenge facing new product development (NPD). In other words, NPD teams must find the means for speeding time to market while also improving product quality and reducing product costs. Cross-functional teams have proved effective for meeting these challenges, and such teams may extend beyond company boundaries to include key materials suppliers.
Effective integration of suppliers into NPD can yield such benefits as reduced cost and improved quality of purchased materials, reduced product development time, and improved access to and application of technology.

As Gary Ragatz, Robert Handfield, and Thomas Scannell point out, however, those benefits do not automatically accrue to any NPD team that includes representatives from a supplier’s company. In a study of 60 member companies from the Michigan State University Global Procurement and Supply Chain Electronic Benchmarking Network, they explore the management practices and the environmental factors that relate most closely to successful integration of suppliers into the NPD process.

The study identifies supplier membership on the NPD project team as the greatest differentiator between most and least successful integration efforts. Although the respondents reported only moderate use of shared education and training, the study cites this management factor as another significant differentiator between most and least successful efforts. Respondents listed direct, cross-functional, intercompany communication as the most widely used technique for integrating suppliers into NPD.

To integrate suppliers into NPD, a company must overcome such barriers as resistance to sharing proprietary information, and the not-invented-here syndrome. The results of this study suggest that overcoming such barriers depends on relationship structuring—that is, shared education and training, formal trust development processes, formalized risk/reward sharing agreements, joint agreement on performance measurements, top management commitment from both companies, and confidence in the supplier’s capabilities. Overcoming these barriers also depends on assett sharing, including intellectual assets such as customer requirements, technology information, and cross-functional communication; physical assets such as linked information systems, technology, and shared plant and equipment; and human assets such as supplier participation on the project team and co-location of personnel.

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