13 April 2016

AEC: A milestone for ASEAN’s economic development

By Jayant Rikhye, Head of International, Asia Pacific and Head of Strategy and Planning, Asia Pacific, HSBC

To the list of emerging Asia’s economic powerhouses, add one more: South East Asia and its 625 million inhabitants.

Spanning countries as diverse as Vietnam, Indonesia, the Philippines and Singapore, the Association of South East Asian Nations is often considered an “also-ran” that gets far less attention than China and India.

To underestimate the region, however, would be a mistake.

ASEAN is already an economic force to be reckoned with: the GDP of its ten members now totals more than $2.5 trillion – about 25 per cent more than India’s, and not far short of the United Kingdom’s. If ASEAN were one economy, and current growth trends continue, it could be the world’s fourth-largest economy by 2050. Its population is roughly double that of the United States. Its economies have attracted investments from corporate giants around the globe, and are deeply embedded in the world’s trade and supply chains. ASEAN economies attracted a combined US$136 billion in foreign direct investment last year, topping China’s US$128 billion.

This year, ASEAN’s economic cohesion received an extra boost, and rendered the region’s potential more visible to the outside world.

On 31 December 2015, the ASEAN Economic Community (AEC) was formally established, marking a milestone in the group’s long path towards a single coherent market. The AEC is aimed at liberalising the flow of goods, services, capital and, ultimately, skilled labour within the region in a bid to raise its competitiveness and facilitate investment into infrastructure.

The AEC builds on decades of incremental work done since ASEAN’s inception in 1967. Free trade in goods, for example, has already been effectively established. But more needs to be done to remove the many obstacles (exclusion lists, and non-tariff barriers such as language or safety requirements) that still hamper the flow in services, for example, and to reduce cross-border financial transaction costs.

If fully implemented the extra steps envisaged under the AEC could raise ASEAN’s GDP by 5 per cent by 2030 – a welcome boost at a time when the fall in raw materials prices is generating pain in parts of the region, and overall growth has cooled.

While there are years of work ahead to complete the integration envisaged by the AEC, the stars are aligned for a promising long-term growth story, thanks to a trio of factors.

First, the region is increasingly attractive as a manufacturing location. China – long the “factory floor of the world” – is shifting its economic model towards more value-added, higher-tech manufacturing and services. This means more of the traditional, labour-intensive manufacturing that was once based in China is moving to ASEAN nations. Meanwhile, South East Asia’s demographics mean an ample supply of affordable labour. China, by contrast, has become more expensive as wages have risen.

ASEAN is already a key manufacturing hub, notably for the electronics and automotive sectors. Toyota manufactures more than 700,000 vehicles a year in Thailand and another 400,000 at its sites in Indonesia, for example. BASF, the German chemicals company, has six production and operation sites in Malaysia alone. General Electric has more than 60 locations and employs 7,600 people across ASEAN. The Philippines has become a major hub for IT and business process outsourcing. More overseas investment is likely to follow as remaining hurdles to trade and investment are lowered.

Second, consumer-spending power is growing rapidly. ASEAN's population numbers less than half that of either China or India, but 15 years from now, the region will have added another 120 million inhabitants - the equivalent of one-and-a-half Germanys).

What is more, South East Asians are becoming more affluent. In 2010, per capita GDP was just US$3,000. ASEAN members aim to raise this to more than $9,000 by 2030. The increased spending power is turning the region into an increasingly key market for anything from cars and airplane tickets to shampoo and mobile phones.

Third, ASEAN is home to an established and trusted international financial centre, in Singapore. Increasing financial liberalisation could help lower transaction costs and facilitate investment flows into ASEAN, aiding economies like Singapore, Malaysia and Thailand, in particular. Other countries, such as Indonesia and the Philippines, could benefit most from increased investments into much-needed infrastructure, which is currently still a weak spot in ASEAN’s overall growth story.

Economically, the countries of South East Asia face near-term headwinds, like many others around the world. But the region’s economic assets, combined with extra lubricant from the AEC efforts, will make it ever more important as a location to manufacture in, source from, and sell to. To ignore it would be a mistake.

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