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

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.