Keynote Speech at the OECD Emerging Markets Network Business Meeting - Stephen Groff | Asian Development Bank

Keynote Speech at the OECD Emerging Markets Network Business Meeting - Stephen Groff

Speech | 8 March 2016

Keynote speech by ADB Vice-President Stephen Groff at the OECD Emerging Markets Network Business Meeting held 8 March 2016 in the OECD Headquarters, Paris, France.

Introduction

Distinguished guests, ladies and gentlemen, on behalf of the Asian Development bank, it is my pleasure to join you today to speak about ASEAN integration and the opportunities this offers. ASEAN is often referred to 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 engaged in its own Free Trade Agreement – the Regional Comprehensive Economic Partnership.

Today, I would like to share some thoughts from three broad perspectives: first, what ASEAN offers as a market to the international business community; second, the work being undertaken - including with the support of the ADB - to develop a fully functioning ASEAN Economic Community (AEC) and integrate it further with the global economy; and finally, the remaining challenges and opportunities for private investment.

I should mention at the outset, that while the private sector stands to benefit greatly from regional integration in Asia, it also plays a pivotal role in driving integration. The business community within ASEAN and beyond is beginning to understand the AEC, and the advantages offered by integration. Businesses are actively developing strategies to deal with and benefit from a stronger AEC. The event today is a good example of this interest.

1. What does an integrated AEC offer?

ASEAN comprises one of the most dynamic regions in the world. If ASEAN were one economy, it would be the seventh largest in the world with a combined GDP of nearly US$3 trillion. If current growth trends continue, it could be the fourth largest by 2050. In terms of per capita income growth, ASEAN has dramatically outpaced the rest of the world since the 1970s. According to McKinsey, the number of consumer households earning over $7500 a year will double to 125 million by 2025. With more than 600 million consumers, ASEAN’s potential market is larger than that of 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 68 million entering the workforce, and new workers needing the right skills.

The AEC, formally launched on 31 December 2015, represents a major milestone in ASEAN’s process of economic integration. ADB projects an average GDP growth rate of 4.9% for the region during 2016, and this could increase to 7%, driven by exports and investment, with the potential to generate 14 million additional jobs by 2025.

2. The AEC and Benefits for Business Partners and Investors

Let me now turn to sharing substantial achievements under the AEC to facilitate trade and investment:

  • In terms of tariff reductions, Common Effective Preferential Tariff (CEPT) 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%. This is a success story of political commitment.
  • To facilitate Trade in goods, a National Single Window — a one-stop shop to speed customs clearance — has gone live in the ASEAN-6, with an ASEAN Single Window gateway as the ultimate goal. In addition, an ASEAN-wide Self Certification process — which will allow exporters to self- certify whether their exports meet origin requirements— is being developed and will be fully implemented in 2016.
  • To promote Services trade liberalization, an ASEAN Framework Agreement on Services (AFAS) is in place to ease restrictions on cross-border services trade in some 80 subsectors — the majority of which allow foreign ownership. So far, members have agreed on mutual recognition agreements or their equivalent for three types of goods and eight professions.
  • Investment liberalization is taking place under the ASEAN Comprehensive Investment Agreement or ACIA, which commits members to liberalize and protect cross-border investment, while applying international best practices in the treatment of foreign investors. Deloitte (2014) reports investment liberalization rates of 85% in all ASEAN countries except Indonesia and Viet Nam, that lag with 80% or less in terms of liberalization measures.
  • Capital markets have long been integrated with the ASEAN-6 stock exchanges collaborating to form ASEAN exchanges, which link ASEAN capital markets to offer more opportunities to investors across the region. In 2012, ASEAN Exchanges launched the ASEAN Trading Link, a gateway for securities brokers to ease access to Stock Exchanges in Malaysia, Singapore and Thailand.
  • Given labor shortages across the region, the exchange of skilled labor is underway through Mutual recognition agreements (MRAs) for eight professional qualifications—architecture, accountancy, surveying, engineering, medical practitioners, dental practitioners, and nurses. But more needs to be done to allow formal recognition and protection of low-skilled and unskilled labour such as in the construction, home care and hospitality industries.
  • To promote Competition and protect Intellectual Property Rights (IPR), eight ASEAN members have passed competition laws; meanwhile most ASEAN member states have IPR legislations and procedures, with Cambodia, Lao PDR and Myanmar lagging behind.

3. Remaining Challenges and opportunities for the Private sector

While progress has been achieved toward creating a single market and production base, some challenges remain—these can be characterized as the harder “second generation” reforms, including removing barriers to trade in sensitive areas like agriculture, steel and the increasingly important areas of services.

Recent data from the World Bank suggests that ASEAN member countries have more restrictive services policies in general than any other region in the world, except for the Gulf States. ASEAN’s average score on the Services Trade Restrictions Index (STRI) is 60 percent higher than the global average, with large variations across ASEAN member states (AMS). Further liberalization in services will require AMS to significantly improve their domestic regulatory environment, particularly prudential regulation in the case of financial services.

While formal tariffs are quite low, non tariff barriers—like antidumping regulations or, in some cases, misuse of sanitary or phytosanitary rules on food for example—need to be fixed, as non-tariff barriers are replacing tariffs as protective measures.

Border barriers such as quantitative restrictions, border administration, and even closures and behind-the-border constraints related to logistics, transport, infrastructure problems, and weak institutions also need to be addressed.

A stronger trade dispute mechanism, competition policy and intellectual property rights protection are also measures that are increasingly becoming important to investors in sophisticated markets.

Opportunities

ASEAN is home to 227 of the world’s companies with more than $1billion in revenues, or 3% of the total globally. Singapore stands out; ranking fifth in the world for corporate headquarters density and first for foreign subsidiaries. ASEAN also accounts for 38% of Asia’s market for Initial public offerings. It also enjoyed a steady increase in Foreign Direct Investment, growing on average 14% since 2000, and now well over $100billion a year.

However, ASEAN comprises of a diverse group of nations; with varying strengths and diverse resource endowments. Most ASEAN countries may be challenged by avoiding the so called Middle Income trap—where growth stalls as labor costs rise and comparative advantage shifts. In such cases, opportunities for investors lie in moving up the product value chains, and ASEAN needs to ready itself for this through state-of-the-art competition policies, innovation, and securing financing for critical physical infrastructure like highways, airports, rails, power grids and gas pipelines.

In this regard, the ASEAN Master Plan on Connectivity is an important long-term initiative, and provides opportunities for the private sector in investment, financing and technology transfer.

Another important initiative is the ASEAN power grid; only 6 of the planned 16 cross–border interconnections are in operation. And a Trans-ASEAN Gas Pipeline is planned, as there are currently only 11 bilateral pipeline connections totaling 3000 km. In aviation, most members have adopted the ASEAN Open Skies Policy for cargo and passengers, aiding regional and international tourism and logistics.

Recent initiatives like the ADB supported ASEAN Infrastructure Fund, and quite possibly the AIIB, are important sources of financing for large-scale projects.

Concluding Remarks

To conclude, the AEC offers tremendous business opportunities to both regional and international business communities. I hope this meeting will explore in greater detail how businesses can contribute to and benefit from ASEAN’s integration. ADB has and will continue to work closely with policy makers and the private sector in helping bring business opportunities to light as we promote ASEAN regional cooperation and integration.

Thank you.