Part 1 of 2: The ASEAN model of economic integration

Part 1 of 2: The ASEAN model of economic integration

Romeo A. Reyes, Jakarta

The Association of Southeast Asian Nations (ASEAN) has gone a
long way since the original five members -- Indonesia, Malaysia,
Philippines, Singapore and Thailand -- signed the Bangkok
Declaration on Aug. 8, 1967, binding them together into a
regional institution to secure peace, freedom, and prosperity for
their peoples. Along with expansion of membership to 10, their
cooperation has broadened and gone beyond the realm of economics
to include political, security, social, and cultural issues,
while preserving the principle of non-interference in each
other's domestic affairs.

At the ASEAN Ministerial Meeting (AMM) in Jakarta late last
month, the foreign ministers have apparently agreed on a Plan of
Action for the realization of an ASEAN Security Community (ASC)
by 2020 despite initial disagreement on sensitive issues relating
to peacekeeping.

While the Plan of Action does not include the original
proposal of a Regional Peacekeeping Force, it could lead to
adoption of an ASEAN Charter that would enable the institution to
acquire a legal personality and make its agreements more binding.

On the economic front, it has fashioned its own model of
economic integration comfortable to its members in terms of
approach, scope, and pace of implementation. A key feature of
this model is the gradual reduction and eventual elimination of
tariff barriers with a two-tier timeline: Zero tariff by 2010 for
the five original members and Brunei, and by 2015 for the
remaining four members -- Cambodia, Lao PDR, Myanmar and Vietnam.

The two-tier timeline was agreed upon in recognition of the
development gap that exists across 10 ASEAN Member Countries and
the different levels of preparedness and comfort in opening up
their markets.

More recently, ASEAN has adopted the so-called 10 Minus X
principle in forging new agreements. Under that principle, all
members must agree to the goal they are targeting.

However, members who do not feel ready can join later or at
the same time but at a slower pace, depending on their level of
development, preparedness and comfort. It is an alternative to
opting out altogether. Flexibility is one unique characteristic
of the ASEAN model of economic integration.

It is worth noting that the fundamental basis of ASEAN's
existence is only a declaration rather than a treaty. The Bangkok
Declaration simply proclaimed the aims of ASEAN to promote peace,
stability and prosperity through regional cooperation, respect
for the rule of law and adherence to UN principles.

It is not like the Treaty of Rome signed on March 25, 1957
that created the European Economic Community (EEC) as a legal
entity, along with a powerful Commission to implement decisions
of its member states and to verify and enforce compliance to
those decisions.

The EEC later became the European Union (EU) when the Treaty
of Maastricht was signed on Feb. 7, 1992. In addition to economic
cooperation, the Treaty on European Union added two other
pillars: Common foreign and security policy; and justice and home
affairs.

For lack of legal personality, ASEAN could not even get an
observer status to attend UN conferences despite its declared
adherence to UN principles. Yet, it did not deter ASEAN Leaders
to embark on a bold vision -- creation of an ASEAN Economic
Community (AEC) by 2020, along with the ASC and the ASEAN Socio-
Cultural Community (ASCC) -- and to pursue a host of regional
cooperation initiatives to realize that vision.

Regional economic integration in Southeast Asia may be seen as
essentially driven by market forces arising from competitive
pressures of globalization. Reacting to market signals,
multinational corporations (MNCs) have been setting the direction
and pace of economic integration.

They are locating their production base where the cost of
doing business is lowest and outsourcing inputs from countries
that can supply them at least cost in producing goods and
services intended for the regional market.

For instance, even without an AEC, a number of MNCs have
decided to set up their production base in Thailand for export to
other ASEAN countries and to other parts of the Asia Pacific
region. If AEC should be successfully established, more MNCs
might be encouraged to locate their operation in ASEAN rather
than China, especially if AEC results in a free flow of goods and
services across ASEAN member countries.

There have been setbacks in WTO negotiations to liberalize
trade due to demands of poor countries to reduce huge farm
subsidies in rich countries in exchange for trade concessions.

Producers in Southeast Asia would therefore need to be
increasingly competitive even in the domestic market. Typically,
however, the market of a Southeast Asian country (including
Indonesia with a population of 220 million) is relatively
limited, especially when compared to India and China.

With economic liberalization, producers in China (whether
Chinese or foreign investors) would have a competitive edge
because of the huge domestic product market for goods and
services, both for consumption and investment, and lower wages
due to abundant supply as well as mobility of labor in the factor
market.

Management of the domestic currency to ensure that the
exchange rate is internationally competitive provides an
additional advantage, enabling them to export their products to
the rest of the world, including to Southeast Asia.

Producers in Southeast Asia are therefore compelled to find
ways of reducing costs in order to survive both in the domestic
and export markets.

To be competitive, they would need to integrate their small
and fragmented markets so that they could benefit from economies
of scale and outsource production inputs from each other,
depending on their respective comparative advantages in the
production chain.

The writer is Senior Adviser, ASEAN-UNDP Partnership Facility.
The views expressed herein are personal and do not necessarily
reflect those of ASEAN Secretariat, any of the ASEAN member
countries, or UNDP.