What next for ASEAN?

  • Date Added: 23rd June 2015 from TMF Group

  • The 10 Southeast Asian economies together received estimated foreign direct investment (FDI) worth US$136 billion in 2014. The record level FDI inflow to the region overtook that of China (US$128 billion) for the second time and the gap is widening.

    Foreign investors are drawn to ASEAN countries as they hope to leverage the region's emerging consumer market, a rising middle class and equally increasing spending power. ASEAN has a combined GDP worth of US$2.5 trillion. If ASEAN were one economy, it would be the seventh-largest in the world and is projected to rank as the fourth- largest economy by 2050.

    Much of the attractiveness of the region is down to its enormous growth opportunities: a population of 620 million (9% of the world), home to the third-largest workforce in the world (behind China and India) and average economic growth rate of around 5.4% per annum since 1980. All of this makes ASEAN one of the most important consumer markets of the future, and helps pave the way for ASEAN to emerge as a powerhouse of the world economy.

    The 'ASEAN Community' is based on three community pillars: economic growth, political security and socio-cultural communities. The ASEAN Economic Community (AEC), in particular, aims to achieve a single competitive economic market, with free movement of goods, services, investment, skilled labour, and capital.

    According to the Asian Economic Journal, the establishment of the AEC could generate US$280bil to US$615bil (equivalent to 5 to 12% of projected ASEAN GDP) in annual economic value by 2030. The AEC would enable the creation of a seamless pan-ASEAN manufacturing hub in a unified economy instead of individual countries. As China's population ages and the workforce becomes more expensive, the formation of an AEC offers the ASEAN region a unique opportunity to replace China and become the next "World's Factory" with its expanding workforce, youthful population and relatively low wages.

    The downstream and upstream industries across ASEAN could actually come together to form regional value chains. Within a single market, MNCs could leverage a combination of countries with unique main economic sectors. They could perform labour-intensive manufacturing in Indonesia and Vietnam, before sending it to Thailand and Malaysia for higher technology assembly and export to the rest of the world through Singapore. The whole business could be supported by BPO industry in the Philippines.

    The diverse range of industrial specialisations in ASEAN would make the region suitable for a wide array of investors. Singapore and Malaysia specialise in electronic products, Thailand is the leading manufacturer of fast moving consumer goods and processed foods, while Vietnam and Cambodia focus on garments. Indonesia, Brunei and the Philippines are the main producers and exporters of natural resources such as palm oil, rubber, sugar cane, rice, cocoa, timber, petroleum, natural gas, coal and tin.
    The vertical and horizontal integration of Southeast Asia economies under the AEC will undoubtedly stimulate intra-regional investment, trade and business connections benefitting both foreign and local firms.

    However, the crucial step in realising the AEC would be the removal of non-tariff barriers (NTBs) which are populist measures designed to protect strategic national industries. Challenges remain in the elimination of NTBs such as a single channel for imports, price control measures, natural resource subsidies, and preferential treatment of state-owned enterprises. Although the withdrawal of NTBs might inflict short-term pain it would eventually be beneficial as competition would push these industries to move up the value chain and increase productivity.

    In short, every step towards creating the AEC tests the commitment and political will of the leaders to sacrifice their national agenda for the common good.

    This is an extract from the briefing paper entitled "The ASEAN Economic Community: Capturing the zeitgeist of rising Asia", published by TMF Group. It is available for download at www.tmf-group.com/en/asean

    Written by:

    John Thorman, New Zealand Managing Director of TMF Group, a leading global provider of high value business services to clients operating and investing internationally

    TMF Group focuses on providing highly specialised and business-critical financial, legal and human resource administrative services that enable clients to operate their corporate structures, finance vehicles and investment funds in different geographical locations. It has more than 120 offices, in 80 countries, across the Americas, Asia Pacific, Europe and the Middle East.

    Visit us at www.tmf-group.com or follow us on twitter @TMFGroup.

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