ASEAN Economic Integration: Challenges and Strategies

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Kiki Verico, Faculty of Economics University of Indonesia

Southeast Asia is among the important pillars in Asia’s economic integration whereby ASEAN is expected to gain solid economic integration from trade and investment. This would mean that ASEAN must have significant and positive relations in her intra regional trade and intra regional investments. Yet a previous study finds them to be significant nevertheless having negative relations (Verico, 2012). Given its long-run economic integration objective, ASEAN must turn this relation into one that is significant and positive. This will require an economic convergence by which an equivalent level of playing field within its member states.

Economic convergence is a necessary condition for a solid regional economic integration.

It will move ASEAN’s economic integration stage from an intra regional trade to that of an intra regional investment. However, ASEAN still faces huge economic gaps between its ASEAN-6 and ASEAN-4 as well as within the groups themselves. This economic divergence becomes a major source of asymmetric information in the ASEAN economy.

Among one of the useful tools to prove this divergence is the ‘gravity model of trade’ (Tinbergen, 1962, Anderson, 1979, Helpman and Krugman, 1985). The model which was inspired by Newton’s Law of gravity describes that among the significant factors in economic integration process are economic size (GDP) and economic level (GNI per capita). Utilizing this model, in terms of economic size, ASEAN must deal with economic biases towards Indonesia’s economy as her nominal GDP is at around 40% of total ASEAN’s nominal GDP, making it too dominant.

In 2011, Indonesia’s nominal economic size (GDP) is around US$ 847 billion, much larger than Thailand at US$ 346 billion, Malaysia at US$ 288 billion, and Singapore at US$ 240 billion. Indonesia’s nominal GDP size is ranked 16in the world, making her the only ASEAN member in the G20 group.

On the other hand, in terms of economic level,

ASEAN’s economic gravity direction is biased towards Singapore’s economy.

According to the World Bank’s atlas method (Gross National Income/GNI per capita per year), the circumstance shows the opposite of the preceding figures. Using 2011 data, among those four countries, the highest income per capita belongs to the lowest economic sized country, which is Singapore. Singapore’s GNI per capita per year is US$ 42,930 that is much higher than Malaysia at US$ 8,770, Thailand at US$ 4,440, while the lowest level among these countries is the highest economic sized country, which is Indonesia at US$ 2,940.

These two figures show that within its member states, ASEAN has a large economic sized country – Indonesia- that has a low economic level and also has a high economic level country – Singapore – yet is a low economic size. Hence ASEAN’s economic power seems to resemble a ‘donut’, lacking a country that has the characteristics of having both a large economic size and high economic level. This is in contrast to the EU’s experience with Germany, a high income country that also has a large economic size of GDP, population and geographic proportions. This ‘donut’-shape is a major challenge for ASEAN in obtaining a solid intra-regional trade and investment.

What does ASEAN need to do to overcome this economic integration disadvantage?

From the market-driven strategy, ASEAN will gain her economic integration advantage when her largest economic-size member attains high-income level. This would mean when Indonesia becomes a developed country. Among the references for this projection is ‘Vision 2030’, where Indonesia is predicted to become a developed country in year 2030 with an income per capita per year above US$ 18,000.

Given this circumstance, furthermore, using the EU’s experience, if the ASEAN Economic Community (AEC) of 2015 is similar to the European Economic Community (EEC) of 1967 then ASEAN is forecasted to complete her comprehensive economic integration in year 2050. The latter is under the assumption that ASEAN will follow EU’s time-frame which took around 35 years to move from EEC of 1967 to Euro as a single currency in 2002.

As from the government intervention strategy, ASEAN could utilize her wide regionalism strategy to increase its intra regional investment. Different from the Custom Union (CU) in Europe, ASEAN adopts an ‘open and soft’ regionalism principle. In its ‘open’ regionalism principle, ASEAN implements the Free Trade Area (FTA) at which the regional economic institution does not regulate external tariff between member state and non-member state enabling each member state to have ‘direct bilateral trade agreements’ with non-member states. This gives benefits to non-member states as they can still have a free trade relation with the member states of ASEAN without being a member themselves.

In its ‘soft’ regionalism principle, ASEAN implements a ‘non-legal binding’ principle without a supranational body. Both the’open and soft’ regionalism principles makes ‘ASEAN-wide frameworks’ such as the ASEAN+1, ASEAN+3 and so on, appropriate for ASEAN.

In the short-run, the ASEAN Plus frameworks will solve ASEAN’s major problem in not having a member state with both large economic size and high income level.

Intra regional investment is estimated to come from the new-member states of such regional-wide frameworks.

At last, the relation between market-driven and government-led strategy is complementary therefore ASEAN must combine them in order to achieve her comprehensive regional economic integration objective.

*Kiki Verico is Co-Editor of Journal of Economics and Finance in Indonesia (EFI) at the Institute for Economic and Social Research Faculty of Economics University of Indonesia (LPEM FEUI), currently living in Canberra.

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3 Comments

Filed under ASEAN, Economic Integration, Investment, Trade

3 responses to “ASEAN Economic Integration: Challenges and Strategies

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