Keynote speech by ADB Vice-President for Operations 2 Stephen Groff at the "German-Business Association AEC: Integration, Connectivity and Financing: What Does Regional Integration in Southeast Asia Mean for the German Business Community?" held on 23 June 2014 in Berlin, Federal Republic of Germany (as drafted).
Distinguished guests, ladies and gentlemen, on behalf of the Asian Development Bank, it is an honor to be here today to talk about the coming ASEAN Economic Community, or AEC, and what it means for the German business community.
In briefly explaining the progress toward establishing an AEC in 2015, I would like to stress how the AEC will generate new opportunities for increased business in Southeast Asia, both today and beyond 2015.
In doing so, it is important to look at the AEC from two perspectives: first, the integration process itself--what has already happened and what needs to happen, both before and after 2015; and second, the challenges and opportunities beyond 2015 as ASEAN increasingly moves toward a functioning AEC and further integrates into the global economy.
The "ASEAN Way" toward an economic community
ASEAN is often referred to internationally as the hub of Asian regionalism. The ASEAN+3 process (which includes China, Japan and Korea) is built around it; as is the ASEAN+6 group (adding India, Australia and New Zealand), which is currently pursuing an ambitious Free Trade Agreement--the Regional Comprehensive Economic Partnership.
As 2015 approaches, the private sector within ASEAN is beginning to understand the AEC and the advantages integration offers. Many conferences around ASEAN today are addressing the topic, "Is the Philippines, or Indonesia, or whichever member, truly ready for the ASEAN Economic Community?" But there is much interest in the AEC outside ASEAN. For example, 54% of senior US business leaders polled in the most recent ASEAN Business Outlook Survey said their company has a strategy to deal with an emerging AEC. And I must say it is heartening to see German business already thinking ahead as well.
Yes, next year is a milestone. But the AEC is a multi-track process, with its scope and speed very much dependent upon national conditions. Consequently, ASEAN’s traditional way of "making haste slowly"--as one ASEAN founder put it--means integration will remain market-driven, bottom-up, and institution-light for the foreseeable future. This is in contrast to Europe’s largely politically-driven, top-down, and institutionalized format. Nonetheless, the so-called "ASEAN Way" of consensus-building is indeed evolving, with its tried and tested way of sustaining momentum being gradually supplemented by new project-driven initiatives.
What does an integrated ASEAN offer?
If ASEAN were one economy, it would be seventh-largest in the world--$2.4 trillion combined GDP in 2013. It could be fourth largest by 2050 if growth trends continue. In terms of per capita income growth, ASEAN has dramatically outpaced the rest of the world since the late 1970s. According to McKinsey, the number of consumer households earning over $7,500 a year will double to 125 million by 2025. With over 600 million people, ASEAN’s potential market is larger than the EU or North America.
Behind China and India, ASEAN has the third-largest labor force in the world; and it remains relatively young. Developing this human capital has, in part, been a major achievement. However, job creation remains a huge challenge with so many entering the workforce, and new workers will need the right skills.
So how can ASEAN integrate?
ASEAN’s diversity gives it great strength. The AEC offers the opportunity to capitalize on diverse resource endowments, comparative advantages of geography, factors of production, and distinct levels of human capital--both education- and demographic-based. While each member pursues its own national reform agenda, collectively they offer all the ingredients for an AEC that benefits all.
There are four pillars to the AEC: (i) a Single Market and Production Base; (ii) Competitive Economic Region; (iii) Equitable Economic Development; and (iv) ASEAN’s Integration into the Global Economy. ASEAN has made significant strides in each.
First is on tariffs. This is a success story of political commitment. Common Effective Preferential Tariff rates are virtually zero for Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand, known as the ASEAN-6. More than 70% of intra-ASEAN trade--a quarter of ASEAN’s total trade worldwide--is now tariff-free, with less than 5% subject to tariffs above 10%.
On trade facilitation, Indonesia, Malaysia, the Philippines, Singapore and Thailand have working national single windows, with the full rollout to all significant ports and airports planned by 2015. Brunei and Viet Nam plan to have theirs online by 2015. An ASEAN Single Window Gateway is the goal.
There is an ASEAN Framework Agreement on Services to ease restrictions on cross-border services trade in some 80 subsectors, the majority of which will allow majority foreign ownership. So far, members have agreed on mutual recognition agreements or their equivalent for three types of goods and seven professions.
On the investment climate, the ASEAN Comprehensive Investment Agreement, or ACIA, commits members to liberalize and protect cross-border investment, applying international best practices in the treatment of foreign investors and their investments. The original five ASEAN members are near achieving international best practices, while newer members have some way to go.
On capital markets, ASEAN-6 stock exchanges have collaborated to form ASEAN Exchanges, which will link ASEAN capital markets to offer more opportunities to investors across the region. In September 2012, ASEAN Exchanges launched the ASEAN Trading Link, a gateway for securities brokers to ease access to Bursa Malaysia, Singaporean and Thai stock exchanges.
According to ASEAN’s own assessment--it will not reach all of its ambitious AEC Blueprint targets which were moved forward from 2020 to the end of 2015 in order to help stimulate and maintain momentum. ASEAN’s own “AEC Scorecard” from March last year showed the region had met 77.5% of its AEC targets. Some harder reforms remain.
But ASEAN is well aware of this, and is already creating a “post-2015” AEC agenda. There is no question ASEAN remains committed to reaching the AEC targets. But it will not rush through half-baked regional reforms that stand little chance of being implemented before the prerequisite domestic or national reforms are in place. Having said this, it is also true that regional reform targets can help national authorities push through the tougher national reforms.
Continuing Issues, Challenges, and Private Sector Opportunities
In creating a single market base, remaining challenges--the harder "second generation" ones--include removing barriers to trade in sensitive areas like agriculture, steel and in services. Non-tariff barriers--like excessive red tape, cumbersome licensing requirements or misuse of sanitary or phytosanitary rules on food--need to be fixed, as non-tariff barriers are replacing tariffs as protective measures.
Somewhat like core Europe and its periphery, ASEAN needs to better meld its newer CLMV members--Cambodia, Laos, Myanmar and Viet Nam--with the more developed ASEAN-6. The Initiative for ASEAN Integration will help promote more Equitable Economic Development--third pillar of the AEC Blueprint. But as integration deepens, there will be both winners and losers: in the short term, some sectors may lose competitiveness when cheaper goods or services are imported. Governments need to be proactive in relocating resources to more efficient sectors, and compensate the losers from integration.
Most of ASEAN may ultimately need to avoid or move beyond the so-called middle income trap--where rapid growth stalls as labor costs rise and comparative advantage shifts. Component manufacturing within value chains will evolve, so ASEAN needs to ready itself through competition policies, investment climates conducive to innovation, and critically important, secure financing for the prerequisite physical infrastructure like highways, airports and rails, power grids and gas pipelines.
In addition, ASEAN’s Master Plan on Connectivity is an important long-term initiative. And recent initiatives like the ADB-supported ASEAN Infrastructure Fund could become an increasingly useful source of financing beyond 2015.
The ASEAN Power Grid is another important network. Six of 16 planned cross-border interconnections are in operation. And a Trans-ASEAN Gas Pipeline is planned. There are currently 11 bilateral pipeline connections totaling over 3,000 km. The project also provides private sector opportunities in investment, financing and technology transfer.
Most members have passed the ASEAN Open Skies Policy for cargo and passengers, which is helping in logistics and tourism, both external and internal.
ASEAN has enjoyed a steady increase in foreign direct investment, or FDI, growing an average 14% since 2000, now well over $100 billion a year.
As we move closer to a working AEC beyond 2015, more businesses will start to develop ASEAN strategies as part of their corporate policies. The emergence of groups like the ASEAN Business Club, backed by some of the region’s biggest corporations, will grow in influence.
In this setting, I should also mention the German-ASEAN Chamber Network--formed 2 years ago among the German Chambers in Indonesia, Malaysia, Singapore, Thailand and Viet Nam--to identify future sunrise industries (such as solar energy) and develop business opportunities (for SMEs in particular). Though I haven’t seen the 2014 survey, I found last year’s survey interesting in that there are an increasing number of German companies with strategies to establish a presence in South-East Asia--primarily to be closer to their customers or provide faster service.
ASEAN is home to many globally competitive companies. ASEAN has 227 of the world’s companies with more than $1 billion in revenues, or 3% of the global total. Singapore stands out; ranking fifth in the world for corporate-headquarters density and first for foreign subsidiaries. And ASEAN now accounts for 38% of Asia’s market for initial public offerings.
I am happy to note that many companies, including foreign ones, are beginning to sample the opportunities provided by ASEAN, for example in increasing cross-border transport flows. In this context, the Asian Landbridge concept, which will connect seven ASEAN countries with each other as well as China, will bolster overland transport links. These will prove faster and more efficient than ocean freight and more cost-effective than flying. The transport itself is handled by a consortium of transport companies, with DB Schenker Logistics, a German company, responsible for overall coordination.
To conclude, there are many opportunities for doing business with ASEAN as it moves toward the 2015 AEC milestone and beyond. I hope today’s conference will explore in much more detail than my cursory rundown here of the challenges ASEAN faces in the years ahead, and the important contributions outside investors can make. ADB has and will continue to work closely with the ASEAN Secretariat and all ASEAN members in helping bring those opportunities to light as we promote ASEAN regional cooperation and integration.
I look forward to the presentations and panel discussions. Thank you.