Economic Caveats

This article is posted not chronogically relative to the other articles in the list, because this article is behind TEMPO's paywall and I want to allow people to read my article in entirely. There are some editings that they made especially on the first two paragraph to introduce me as the author. Not sure why they cal me an economist, though from this article, I guess nobody can tell.

The Indonesian version of Tempo does not include neither my article nor the ASEAN report.

Off topic: dunno if I should trust this but apparently this version vanished from stands and at every hotel in Bali. It is said that foreign delegates took them all. Most likely to help them through the meeting, to whittle away those boring hours.

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November 16, 2011
Economic Caveats

Should everthing go as planned, by 2015 ASEAN will be launching its ASEAN Economic Community (AEC) set of principles, in which economies of ASEAN states will be more integrated. Are there lessons to be learned from the European Union case? Economist Yohanes Sulaiman, a lecturer at the Indonesian National Defense University sounds out some caveats.

The ASEAN Secretariat recently declared that  "the elimination of tariffs, free movement of professionals, freer movement of capital, and a streamlined customs clearance procedure" were elements of a regional economic community. In fact, the AEC aims to "transform ASEAN into a single market and production base that is highly competitive and fully integrated into the global economy." Eventually, it even wants to establish its own single currency.

If this scheme is successful, this might signal the coming of ASEAN as a new economic powerhouse. Similar to the European Economic Community that ended up becoming European Union, the ASEAN Economic Community would increase interdependence among member states and thus integration among member states into one cohesive bloc that could compete competitively in the global market thanks to its economic of scale. For instance, even in 2009, the combined ASEAN GDP was US$ 1.5 trillion, far ahead of India's US$ 1.2 trillion and Republic of Korea's US$ 833 million, though it was still below China's US 5 trillion.

Indeed, this will be a huge transformation from the current associative-like structure, where the main goal is to simply improve communication and to reduce tension among member states and to promote a mutually beneficial cooperation, without trying to interfere in domestic policy-making. By aiming to establish a single currency, ASEAN would have to interfere in its members' economic policies, in order to maintain the credibility of its currency.

So far, the economic indicators are encouraging. The average tariff on import from ASEAN nations is steadily declining from between 4-5% in 2000 to 1.05% in 2010. The reduction in tariff in turn helps fostering more intra-ASEAN trade, and in turn bolstering the region's economy.

The impact of the reduction in trade barrier is evident in the statistical data: the value of intra ASEAN trade has been steadily growing, except in the year 2009, when the global economic crisis started. By 2009, intra-ASEAN trade comprised 24.5% of total ASEAN's trade as noted in the following table:

Indicator	Unit/Scale	1998	2000	2003	2007	2008	2009
Intra-ASEAN Trade (export and import)	Value (US$ million)	120,918	166,846	206,732	401,920	470,112	376,207
	Growth (%)	-19.4	25.8	29.3	13.9	17	-20
	Share to total trade (%)	21	22	25.1	25	24.8	24.5

Source: ASEAN Trade Statistics Database (September 2010)

Yet the improvement in data could not paper over the underlying problem within the scheme, notably the significant differences in the GDP, population and the quality of population itself, poverty rate, bureaucratic hassles, and more importantly the creation institution that will manage the community.

Brunei and Singapore have the highest GDP per capita in the region at US$ 37,000, while in contrast, both Myanmar and Cambodia have the lowest GDP per capita at respectively US$ 446 and US$ 837. There is also difference in the number of population below the poverty line: Laos and Cambodia have a significant majority of their population living under poverty line.

Country	GDP (2008) In US $Billion	GDP per Capita (2008) in US$	Population (2008) in million	Human Development Index	Poverty head count ratio (%)	Regulatory Quality Rank	Ease of Doing Business Rank
Brunei	14.6	37,053	0.4	0.9	N/A	75.8	14
Cambodia	9.6	651	14.7	0.6	68	34.3	22
Indonesia	514.4	2.254	228.3	0.7	54	45.4	19
Laos	5.2	837	6.2	0.6	77	9.7	24
Malaysia	194.9	7,221	27	0.8	8	60.4	4
Myanmar	26.2	446	58.8	0.6	N/A	1	N/A
Philippines	166.9	1,847	90.3	0.8	45	51.7	21
Singapore	181.9	37,597	4.8	0.9	N/A	99.5	1
Thailand	260.7	3,869	67.4	0.8	12	59.9	3
Vietnam	90.7	1,052	86.2	0.7	48	32.4	13

Note:

• Regulatory Quality Rank reflects the ability of the government to provide sound policies and regulations that enable and promote private sector development.
• A high ranking on the "Ease of Doing Business" index indicates that the regulatory environment is conducive to the operation of business.

Source: Hall Hill and Jayant Menon, ASEAN Economic Integration: Features, Fulfillments, Failures and the Future (Asian Development Bank, December 2010)

Of course, for an associative organization such as ASEAN, such stark economic differences don't really matter. Yet, in a much stronger union with free flowing capital and trade and not to mention a common currency, such economic disparity will make it very difficult to create an agreed economic policy, due to the different economic needs of each member, even though a common economic policy is the foundation for a successful economic and currency union.

At the same time, there are problems with the bureaucracy and regulations. Singapore is the region's best place to do businesses with streamlined bureaucracy and business-friendly regulations, while in Indonesia, decentralization process that started after the fall of Suharto in 1998 made it very difficult to conduct business due to the patchwork of local regulations that sometimes contradicts the central government's directives, with little legal recourse available.

This in turn brings into question the implementation of the economic agreements that usually requires economic reforms and austerity programs especially in time of crisis. Will there be a political will from the governments of poor states that usually also have corrupt legal system to conduct much needed economic reform? More importantly, will there be an institution that will enforce the agreed agreements, not unlike the European Union bureaucracy in Brussels? All of these questions will matter when the good times are over and economic difficulties begin.

The ASEAN Economic Community Blueprint unfortunately does not address those worst case scenarios. Rather, it punted by simply stating that "Ministers-in-Charge of Economic Integration in the Council of ASEAN Economic Community shall be accountable." Meaning, that the community will rely on self-policing and more consultations, which is the hallmark of the current ASEAN institution.

The problem is that as evident in the current turmoil in the European Union, the market simply won't wait during an economic crisis. It took a long time for consensus-driven European Union to get a rescue plan on the table and by then, the crisis had spread from Greece to Italy, creating a crisis of confidence, a much larger problem that even threatened the European Union itself.

Therefore, it might be wise to rethink the idea of 2015 ASEAN Economic integration. Rather than focusing on lofty goals, ASEAN should instead focuses on ironing the nitty-gritty, crafting a strong economic institution that can be used as a pillar of stability in times of trouble. While the current "consultative" style may be appealing to interference-averse nations, in times of troubles, when decisive actions are needed, it will be the straw that breaks the camelback.