'ASEAN should buck up or risk losing investments'

'ASEAN should buck up or risk losing investments'

P. Parameswaran, Agence France-Presse, Phnom Penh

Resource-rich Southeast Asian economies have failed to capitalize on their strengths and face a serious competitive challenge, warned an independent study presented to ASEAN leaders at their summit here Monday.

The study was done by international consulting firm McKinsey and Co. on a request by the 10-member Association of Southeast Asian (ASEAN) leaders, concerned by the erosion of the region's economic competitiveness.

The firm conducted microeconomic analyses and sector studies, including interviews with more than 100 investor executives, with the findings benchmarked with the European Union (EU) as well as free trade areas being developed in North America and Latin America.

The study found the cost of doing business in ASEAN "unnecessarily high."

The no-holds barred report was expected to be adopted by the leaders at their two-day summit, which opened Monday, and was to be used by a high-level task force set up by ASEAN's economic ministers to deepen integration beyond a free trade area being set up in the region, ASEAN secretary-general Rodolfo Severino told reporters.

Malaysian Foreign Minister Syed Hamid Albar, commenting on the report, said ASEAN leaders realized certain "bold and cohesive political decisions" should be made to ensure the region progressed.

ASEAN, with a total population of 500 million people, is implementing a free trade area in which its senior members -- Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand -- will totally abolish tariffs for intra-regional trade by 2010.

Newer members Cambodia, Laos, Myanmar and Vietnam are to dismantle all tariffs 10 years later.

The McKinsey study stressed that ASEAN, once the world's fastest investment-driven region, "faces a serious competitiveness challenge" even though more than 75 percent of its exports were in the highest growth sectors globally.

Also, despite its vast natural resources, human resources potential and a total market size comparable to coastal China, ASEAN had "failed to fully capitalize on its strength," the study said.

It also noted ASEAN's investment and export trends were "worrying as investors are deterred by problems created by the limited integration of ASEAN, with few viewing the region as a single market."

"ASEAN's small, fragmented markets are not attractive to investors compared to the large Chinese market and more integrated regions elsewhere in the world," the study said. Consumer electronic firms were moving both manufacturing and research and development to China, taking suppliers with them, it noted.

On the high cost of doing business in ASEAN, the report cited as an example consumer goods companies, which it said incurred costs as high as 15 percent of sales due to different product standards and customs red tape.

The McKinsey report also said trade barriers in ASEAN prevented companies from specializing and achieving economies of scale across the region.

Citing the automotive industry as an example, the study said "no automotive manufacturer in ASEAN has met the minimum efficient production scale".

McKinsey identified two key sectors that required an ASEAN push towards economic integration -- the electronics and consumer goods industries.

ASEAN secretary-general Severino, in his report to the ASEAN leaders, said while the ASEAN free trade area was on track, the process of regional integration had slowed.

"Regional economic integration seems to have become stuck in framework agreements, work programs and master plans," he said.