Part 2 of 2: ASEAN: A single market and production base

Romeo A. Reyes, Jakarta

Without doubt, the primary objective behind the decision to build a community functioning as a single market and production base is to enhance economic competitiveness of ASEAN producers, i.e. to be able to produce and sell in the domestic, regional and international market.

But beyond a highly competitive and therefore prosperous economic region, the leaders also envision it to be one in which there is equitable economic development and reduced poverty and socio-economic disparities by 2020.

Indeed, with increasing globalization of economic transactions, firms have to be internationally competitive even in their domestic market.

As goods and services flow freely in a single market of half a billion population, more opportunities for specialization in a particular sector or sub-sector would be created, based on the comparative advantages of the 10 member countries. Countries where power can be produced and distributed at a relatively lower cost could specialize in power intensive industries.

Other countries with abundant skilled labor could specialize in skilled labor intensive sectors. Production costs would also be lower because of economies of scale, thereby enhancing competitiveness. Entrepreneurs would be attracted to set up and do business in ASEAN as an alternative to China and other big single markets. They would also be encouraged to outsource their inputs from within the Community rather than from outside in the production supply chain.

There is, however, one big factor that would constrain any measure to transform ASEAN into a single market and production base: The development gap that currently exists between member countries.

The per capita gross domestic product (GDP) of the richest country is 14 times more than that of the poorest country, even when GDP is compared in terms of purchasing power parity. When market exchange rate is used, the disparity becomes much bigger.

ASEAN must therefore reduce this huge development divide so that member countries can move forward towards economic integration in a unified manner and the benefits of integration are equitably shared.

Another constraining factor would be the limited liberalization in the factor market. Closer examination of the HLTF Recommendation adopted by Bali Concord II would reveal that economic integration in the factor market even in the 11 priority sectors would remain restricted.

With respect to labor, free flow of skilled labor only is included in the characterization of the AEC, implying that movement of unskilled labor will continue to be restricted. In fact, not even movement of skilled labor is included in the main text of Bali Concord II, indicating an internal contradiction in the Declaration itself.

With respect to capital, only a freer flow is targeted by 2020 and presumably by 2010 in the 11 priority sectors identified for accelerated integration. This implies that capital entry and exit will continue to be restricted and regulated by then but will be "freer" relative to the situation in 2003.

These aspects of integration in the factor market would need to be operationally defined and agreed upon as soon as possible so that acceleration of economic integration in the 11 priority sectors would not be jeopardized. In particular, what would be an operational definition of a skilled labor, or a semi-skilled labor for that matter, that would be agreeable to the member countries? What exactly would be the limitations to the entry and exit of capital within ASEAN?

Subject to the constraints arising from the development divide and to restrictions in the flow of labor and capital, ASEAN leaders envision an economic community of 10 (or more?) nations functioning as a single market and production base by 2020, and by 2010 in the 11 priority sectors.

The premise is that economic integration would enhance economic efficiency and competitiveness, and thereby promote sustained economic growth, reduce poverty and economic disparities, and realize equitable and inclusive development of the countries comprising the community.

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