ASEAN model inadequate for AEC

ASEAN model inadequate for AEC

Arya B. Gaduh, Jakarta

In reading Romeo Reyes' description of The ASEAN model of
economic integration (The Jakarta Post, July 19-20), it is hard
not to become skeptical over the issue.

Mind you, it is not the benefits of integration that I am
skeptical about; I share Reyes's conviction that integration will
greatly benefit the region's economies. However, to keep up with
developments in global trade, the Association of Southeast Asian
Nations (ASEAN) must move quickly, lest regional integration --
and the envisaged ASEAN economic community (AEC) -- be overtaken
by events and rendered irrelevant.

This is where my skepticism lies: With the current
institutional setup, ASEAN isn't nimble enough to complete
regional integration before the concept becomes obsolete. At the
heart of this ineptness is ASEAN's reluctance to ensure the
commitment of all members, by all means necessary, to its
integration effort.

Take the "10 minus X" principle -- an ASEAN principle that
allows member countries to opt out of agreements for which it is
not yet ready. A country can abstain from joining an agreement
for as long as it thinks necessary.

By allowing countries to pick and choose agreements, this
principle will hold back the integration process. In addition,
integration is unlikely to achieve the single market and
production base that underlies the AEC speedily enough, if at
all. Other voluntary approaches derived from "the ASEAN way"
philosophy will cause similar drags.

But wait: Didn't skeptics previously predict the failure of
the ASEAN Free Trade Agreement (AFTA)? And didn't ASEAN prove
them wrong by achieving AFTA's tariff goals as scheduled, despite
voluntarism? Won't ASEAN do the same with the AEC?

Perhaps -- but not if it thinks, erringly, that the challenges
posed by AFTA and the AEC are similar in nature as well as in
magnitude. They are not.

The AFTA is mainly about liberalizing tariffs. With trade
liberalization, benefits will primarily accrue to the
liberalizing country, irrespective of others' actions. A country
will gain from opening up its market, even when others close
theirs. Hence, the benefits -- and costs -- of participation --
and non-participation -- in AFTA are enjoyed individually, and
are not shared with fellow ASEAN members.

The AEC is very different from the AFTA. Going beyond
liberalization, the AEC aims to exploit the region's strength to
attract investment and turn it into a global production base. If
the AEC is successfully implemented, with a greater utilization
of intra-regional cooperation, ASEAN will, as a whole, be greater
than the sum of its parts. Trade and investment will no longer be
made on the basis of individual members' strength, but on the
region's.

But this is a tall order. To utilize the region's strength,
investors must be convinced that the incentives for setting up
business anywhere in ASEAN are identical or roughly so, and that
costs to move goods within ASEAN are similar and negligible to
support an efficient, intra-regional chain of production. Else,
investors will exploit the differences in incentives and
transaction costs between member countries and undermine the
notion of a single production base.

These requirements highlight the institutional challenges of
the AEC in comparison to the AFTA. In AFTA, the benefits and
costs of participation and non-participation are individually
enjoyed; in the AEC, they are shared with other ASEAN members.
Worse, sometimes non-participants in an agreement can gain at the
expense of participants.

Take, for example, the harmonization of investment incentives.
Suppose all members agree to limit tax incentives to a certain
level. A member country that exempts itself from this agreement
stands to gain by offering incentives beyond the agreed level to
lure investors, making it more attractive in relation to the
rest. It is not difficult to foresee that everyone else will
eventually back out of the agreement.

One way to think about the AEC is to think of it as a cartel.
A cartel can only be successful if all members stick to the
agreed rules of the game; however, there is an incentive to
defect because this will bring added benefits at the cost of non-
defectors. Without a mechanism to prevent defectors, it is
inevitable that the cartel will fall apart. Voluntarism cannot
work for the AEC.

This brings me back to my skepticism of the ASEAN economic
integration model. As it stands, ASEAN still relies a lot on
voluntarism and does not have effective mechanisms to prevent
defections from its agreements -- either in enforcing previous
commitments or in ensuring eventual -- and, preferably, immediate
-- participation of all members in most, if not all, of its
agreements.

This is unfortunate. As in any cartel, ASEAN members stand to
gain by forming the AEC rather than going it alone in the
fiercely competitive global environment. The AEC will provide its
members a competitive edge, as well as increased bargaining power
in global negotiations. However, without transparent, rule-based
agreements that are vigorously enforced, the ASEAN economic
cartel will never materialize.

But who knows? In the past, ASEAN has displayed enough
pragmatism to achieve what it set out to do. Let us hope it does
just that and does it quickly, as time is not on ASEAN's side --
this time around.

The writer is a researcher at the Centre for Strategic and
International Studies (CSIS). He can be reached at
abgaduh@csis.or.id