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.