ASEAN combats India, China

Michael Alan Hamlin

Posted on August 23, 2006

But will have to face up to resistance to change

Malaysia trade minister Rafidah Aziz said over the weekend that ASEAN’s original member states – Brunei, Indonesia, Malaysia, Singapore, Philippines, and Thailand – should commit themselves to fast-forwarding integration of their economies and forming a cohesive trading bloc to compete against China and India. She made her remarks on the outset of meetings in Kuala Lumpur between economic ministers that will run throughout the week.

Rafidah said that trade between ASEAN states should ultimately be seamless. “By seamless I mean that there is really harmonization across the board,” she said, noting the need to remove barriers “which are causing delays in bringing products into each other’s markets.” ASEAN economic ministers and their heads-of-state are slowly coming to the realization that to compete for foreign investment with the $7 trillion domestic China market, Southeast Asia must leverage the synergy of its much smaller individual economies. But is “realization” enough?

Even combined, ASEAN has a significant challenge. Together, the 10-member ASEAN states have a domestic economy about one tenth the size of China’s: $737 billion. Last year, China received over $50 billion in foreign direct investment compared to ASEAN’s combined take of $26 billion, $2 billion less than the $28 billion the group of nations received before the Asian financial crisis that began in 1997. ASEAN has about half the population of China, and GDP growth ranges from around four to eight percent. China’s GDP is growing up to twice as fast as some ASEAN economies at almost 9.9 percent.

But the real challenge to economic seamlessness in ASEAN is ASEAN leaders themselves. Apparently in nearly the same breath that Rafidah called for economic integration, she said that because ASEAN political and economic regimes vary significantly, that there are limits to how fast liberalization can take place. “Let us not pressure ourselves,” Rafidah said. “It takes time for harmonization to come about. We have to recognize this.”

In fact, ASEAN has been very slow in fostering economic integration. For many years foreign investors and a few Asian multinationals have lobbied hard for the regional integration required to achieve economies of scale in many industries, such as automobile manufacturing. While limited progress has been made, government regulators protecting domestic parts manufacturers continue to act as barriers to true supply-chain integration across borders.

Brett M. Decker, senior vice president, Export-Import Bank of the United States, suggests that this protectionist mindset is holding ASEAN back, and hurting its citizens. “It’s vital to mature out of the perspective that protectionism is good for a national or regional economy,” he told me early this week. “Tariffs are damaging not only to domestic consumers who are left with fewer choices and higher prices, but also to manufacturers who are forced to pay more for the imported raw materials needed to produce their goods.”

An old Asia hand, Decker was previously an editor and writer for The Asian Wall Street Journal, and traveled and reported widely on ASEAN affairs, including politics and the economy. He later moved to the Washington Times, but maintained his interest in Asia. Decker continues to follow events in Asia closely, and travels regularly to the region to meet with top government officials and private-sector executives.

“With approximately half a billion people, ASEAN has the size and talent pool to compete with regional giants China and India, but there will be no real race if ASEAN keeps itself tangled up in red tape,” he warns. “To this end, there are plenty of opportunities to deregulate, privatize, reform bureaucracies, and build more hospitable infrastructure to stimulate a meaningful increase in foreign investment.”

China has grown rapidly for many years as investors have sought to leverage its large domestic market, low prices, and an increasingly business-friendly government. As investors rushed to China, more followed. Indeed, one executive overseeing his firm’s investments in the Philippines once told me, “There is considerable pressure on American business to be in China. If you aren’t in China, you’re not viewed as an industry-leading firm.”

When ASEAN’s goal is to achieve a similar status as the place for investors to be – as fast as possible; not when possible – it will have finally climbed over the biggest hurdle to regional competitiveness: resistance to change among government leaders and entrenched domestic conglomerates intent on protecting markets to the detriment of local economies and consumers alike.

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