Association of Southeast Asian Nations Economic Integration: Developments and Challenges

• Date: 01 June 2011
• Published date: 01 June 2011
• Author: Siow Yue CHIA
• DOI: http://doi.org/10.1111/j.1748-3131.2011.01178.x

Association of Southeast Asian Nations

Economic Integration: Developments

and Challenges

Siow Yue CHIA†

Singapore Institute of International Affairs

The Association of Southeast Asian Nations (ASEAN) was formed in 1967 for geopolitical reasons,

but faced with the competitive threat from the North American Free Trade Agreement and the

European Single Market, it embarkedin 1992 on the ASEAN Free Trade Area in goods, followedby

liberalization of services trade and investment flows. A subsequent competitive threat from the rise

of China and India led to the ASEAN Economic Community in 2003, targeted at creating a single

market and production base and a competitive region with equitable economic development and

integrated with the global economy. The ASEAN Economic Community is not quite a common

market as it allows for only freer flows of capital and free flows of skilled labor.ASEAN’s economic

diversity led to difficulties with implementation and the need to narrow the development gap.

ASEAN’s dependence on global markets and investors led to the emphasis on open regionalism,

support of the World Trade Organization, and free trade agreements with its major trade and

investment partners.aepr_117843..63

Key words: ASEAN, economic integration, international investment, international trade

JEL codes: F1, F4, F5

1. Introduction

The Association of Southeast Asian Nations (ASEAN) was formed in 1967 by Indonesia,

Malaysia, the Philippines, Singapore, and Thailand with the underlying objective of

regional peace and security. Brunei joined in 1984 (forming theASEAN6) and Cambodia,

Laos, Myanmar, and Vietnam (hereafter referred to as CLMV) in 1995–1999. Economic

cooperation schemes began only with the 1977 ASEAN Preferential Trading Arrangement.

Serious efforts at economic integration began with the 1992 ASEAN Free Trade Area

(AFTA),and widened and deepened with the 2003 ASEAN Economic Community (AEC).

ASEAN as a political-security organization has managed to achieve regional peace and

security, although bilateral territorial spats continue to erupt from time to time.ASEAN

as an economic integration organization has often been criticized for failing to meet its

commitments. The political economy considerations arenot usually publicized in ASEAN

documents as ASEAN seeks to maintain a “united front” and is reluctant to invoke

penalties. Milestones in economic integration have been driven by external events rather

than an internal long-term vision.

†Correspondence: Siow Yue Chia, Singapore Institute of International Affairs, 2 Nassim Road,

Singapore 258370. Email: chiasy@singnet.com.sg

doi: 10.1111/j.1748-3131.2011.01178.x Asian Economic Policy Review (2011) 6, 43–63

© 2011 The Author

Asian Economic Policy Review © 2011 Japan Center for Economic Research 43

This paper focuses only on the economic achievements and challenges of ASEAN

economic integration, tracing its developments from the pre-AFTA period, to the AFTA

period from 1992–2007, and then the AEC period from 2008 onward. While commit-

ments on paper are often impressive, especially on the AEC, the devil is in the various

exclusions and exceptions and in the implementation record.

2. The ASEAN Economies

2.1 Economic diversity

The ASEAN countries vary in size, resource endowments, levelof economic development,

technological capability, and openness of their trade and investment regimes, as wellas in

political, social, and cultural institutions and practices. Over the years,ASEAN economic

diversity has widened and deepened with the expansion of membership to include the

CLMV, and with the differential rates of economic growth. Table 1 highlights the differ-

ences in population size, gross national income (GNI), per capita GNI,trade volume, and

trade/GNI ratio.

Table 2 showsthe w ide diversity in rankings on the“ease of doing business” in ASEAN

countries compiled by the World Bank. The table averages the rankings for the years

2009–2011. Singapore ranked number 1 globally, followed by Thailand (15), Malaysia

(21), Vietnam (88),and Brunei (99). At the other end of the spectrum are Cambodia, the

Philippines, and Laos. There are also wide variations among ASEAN countries in the

various components of the “ease of doing business.”

Wide differences amongASEAN countries in competitiveness and economic openness

have slowed consensus building and the pace of economic liberalization and integration.

It did not help that in the early years of ASEAN there was limited economic complemen-

tarity, as geographic proximity resulted in similar and competing natural resource

endowments and exports, and low technological capabilities led to competing exports of

labor-intensive manufactures.It also did not help that the less developed CLMV were also

undergoing economic transition from command economies. However, ASEAN’s diversity

also had a plus side – differentiated cost structures facilitate foreign multinational

company (MNC) investments in regional production networks and spur the growth of

intra-industry and intraregional trade.

2.2 Trade and investment patterns

Table 3 shows intra-ASEAN trade accounting for only 25% of the region’s total trade in

2006. ASEAN comprises small- and medium-sized developing economies whose foreign

direct investment (FDI) inflows and links to productionchains come mainly from outside

the region. However, since the implementation of AFTA, the intra-ASEAN share of

ASEAN’s total trade for the ASEAN+6 has risen from 19.2% in 1993. No comparable

data are available for the CLMV as they joined ASEAN after 1993. Dependence on

ASEAN sourcing is highest for Laos and Myanmar (mainly from Thailand) and Brunei

(mainly from Singapore). Dependence on ASEAN as a market is highest for Laos and

Myanmar and lowest for Cambodia. Among the ASEAN+6, the Philippines is the least

Economic Integration Siow Yue Chia

© 2011 The Author

Asian Economic Policy Review © 2011 Japan Center for Economic Research

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