Established in 1967, the Association of South East Asian Nation (ASEAN) is still considered to be an important player in the global economy. Its favorable conditions including its sizable population, abundant natural resources, and strategic location have provided comparative advantages in international trade and global investment. To further their regional integration, ASEAN members aim to establish the ASEAN Economic Community (AEC), a regional integration framework and platform which will be put into force in 2015.
How ready is Indonesia to enter the AEC?
The Economic Outlook
ASEAN accounts for 6% of total world trade and the third largest destination for the United States (US)’ Foreign Direct Investment (FDI) which has grown at the level of 55% since 2004. The US’ FDI was valued at US$ 130 billion in 2007. Its GDP has grown by nearly 170% over the last decade. ASEAN has successfully recovered from the global economic crisis with a consistent medium-growth. According to the 2010 OECD economic outlook, the economies of ASEAN-6 members will grow by average 6.1% in 2015. These statistics clearly highlight the importance of the ASEAN’s role in today’s global trade system.
The intra-regional trade in the Southeast Asian region also shows significant figures. Statistics show that in 2009, the value of intra-ASEAN trade was counted for US$ 376,207.3 million or 24.5% of total trade (ASEAN Secretary, 2010). The Common Effective Preferential Tariff (CEPT), an agreed effective tariff, preferential to ASEAN, to be applied to goods originating from ASEAN member countries, to some extent explains this high interdependence among ASEAN members.
The Progress towards the AEC
Regardless to some detail economic aspects, the urgency of the ASEAN integration is evident. This integration should be aimed at facilitating all ASEAN members to achieve positive and continuous growth. From Indonesia’s point of view, as the largest economy in the region, the ASEAN integration is considered to be necessary milestones for further opportunities. Yet, challenges still remain to achieve this goal.
From people’s perception, a study conducted by Benny and Kamarulnizam (2011) shows that Indonesian people generally have high awareness of the ASEAN’s existence, functions, and objectives. They also have a good understanding of Indonesia’s roles in the ASEAN as well as the importance of closer mutual agreements between Indonesia and other ASEAN members.
Although they know much about the ASEAN, Indonesian people appear to have only little knowledge about the idea of the AEC. Most of the respondents (around 80%) have never even heard or read about the AEC and its founding document.
There are several reasons to explain their lack of knowledge about the AEC. This could be due to the government’s failure to socialize and explain the concept of the AEC to the public. The idea of the AEC might be elitist and state-centric and designed without involving public participation. The public might also see little relevance between the potential benefits that the AEC could provide and their day-to-day lives. Nevertheless, despite their lack of knowledge about the AEC, most of the Indonesian respondents still agree with the concept of the AEC.
Steps Taken by the Indonesian Government and Remaining Challenges
To improve Indonesia’s competitiveness, Indonesian Trade Ministry is urged to underpin the acceleration of industrial readiness within the integration framework. According to a research report prepared by the Trade Ministry (2009), the AEC obligates standard harmonization among member countries. This means all industrial products must be regionally standardized, under the scheme of the Mutual Recognition Agreement (MRA). Priority sectors covered include wood-based products, automotive, rubber-based products, textiles and apparel, agro-based products, fisheries, electric and electronic equipment (EEE), e-ASEAN, health care, air travel, tourism and logistic services.
The report finds that Indonesia is left behind from Malaysia, Singapore, Thailand, and Vietnam, in terms of the readiness of the MRA implementation. In the case of EEE sector, 199 products have to be harmonized in standard. Malaysia has registered 156 products, followed by Thailand (56), Singapore (34), and Vietnam (20) while Indonesia has only registered 19 products. The registration of a product may indicate the product’s competitiveness in the ASEAN single market.
In food sectors, ASEAN members have committed to register 80 prepared food categories to be standardized, referring to the General Standard for Food Additives (GFSA). However, Indonesia would probably need more efforts since its 21 out of 80 prepared food categories have no mandatory national standard (SNI) yet. The mandatory national standard (SNI Wajib) should be implemented prior to ASEAN products registration. The Trade Ministry’s report reveals that the lack of accredited laboratories might be one of the barriers in the implementation and evaluation of the mandatory SNI.
Another challenge comes from the readiness of infrastructure. Risti Permani (The Jakarta Post, 20/6/2011) accentuates the mammoth challenge as well as the urgency of government’s efforts to ensure equality in infrastructure development. It is clear that the inequality does not only exist between rural and urban areas but also between regions across Indonesia.
In short, it is important for the Indonesian Government to take into account findings from the Ministry of Trade’s report in order to accelerate Indonesia’s progress in preparing for the AEC. There is only 4 years left before the AEC put into force. Some recommendations including conducting a comprehensive analysis of Indonesia’s competitiveness as well as encouraging people to be active in the design of various programs related to the AEC should be taken into considerations.
In the face of the increasing economic integration, Indonesia’s failure to compete with other countries would result in the overtaking of its position in the global market. Infrastructure development by inviting foreign investors as well as establishing strong and promoting mutual public-private partnerships also need to be considered more profoundly. Thus, a breakthrough action is needed to deal with these challenges. Otherwise, Indonesia will potentially lose the opportunities of benefiting from the ASEAN integration.
This article is prepared by Bagus Wicaksena. He works for the Ministry of Trade of the Republic of Indonesia and is currently undertaking a postgraduate study in Global Food and Agricultural Business (Trade Policy) at School of Agriculture, Food, and Wine at The University of Adelaide. The opinions expressed are his own.