Will the ASEAN Economic Community (AEC) transform Southeast Asian economies in 2015?

Memo #322

By Kai Ostwald – kai.ostwald [at] ubc.ca and Krislert Samphantharak – krislert [at] ucsd.edu

December 31, 2015 is the launch date of the ASEAN Economic Community (AEC), possibly the most ambitious undertaking to date of the ten-member Association of Southeast Asian Nations (ASEAN). Envisioned as the culmination of decades-old economic integration efforts to create a free market for goods, services, investment, capital, and skilled labor, ASEAN hopes the AEC will provide additional dynamism and growth to the region’s 600 million consumers and producers, who collectively constitute the world’s seventh largest economy.

Can the AEC achieve these goals? We argue that the AEC should be seen as a modest and incremental step in the region’s economic development, rather than an end point; while significant successes in reducing tariffs on manufactured goods have occurred, liberalization in services, investment, capital, and the movement of skilled labor remains far from compete. A number of significant obstacles will prevent the region from making substantial progress on those important fronts in the coming year.

The primary reason is institutional: the AEC continues to operate within the established ASEAN framework, which importantly rests on the principle of non-interference in the domestic matters of member countries. This renders the AEC targets ultimately aspirational rather than binding in nature. The remarkable diversity across ASEAN countries on multiple dimensions will prevent the development of more binding mechanisms in the foreseeable future. In addition, the current domestic political instability in numerous ASEAN countries decreases the willingness of governments to take the political risks necessary to liberalize contentious capital and labor markets. Lastly, the fate of ASEAN continues to hinge on the actions of regional giant Indonesia, whose recently inaugurated president Jokowi has signaled a move away from the “thousand friends, zero enemies” approach of his predecessor to one that more aggressively asserts Indonesia’s interests; this has the potential to complicate region-wide coordination.

While the AEC will not be the game changer that other major regional economic communities have been, it will create significant opportunities for individual sectors and firms. Credible estimates suggest that it could result in an additional $280-625 billion USD in annual GDP by 2030. Thus, even if only a modest and incremental development, the AEC represents yet another important milestone in the region’s development.

About the Authors:

Kai Ostwald is an assistant professor in the Institute of Asian Research and the Department of Political Science, as well as the Co-Director of the Centre for Southeast Asia Research, at the University of British Columbia in Vancouver.

Krislert Samphantharak is an associate professor in the School of International Relations and Pacific Studies at the University of California, San Diego.

A cartoon representation of a serious undertaking. An ASEAN graphic of the AEC member states (credit: ASEAN).

Keppel Container Terminal in Singapore (credit: Kroisenbrunner).

Links:

• ASEAN Economic Community (AEC) official website

• Sanchita Basu Das, et al., eds., The ASEAN Economic Community: A Work In Progress (Asian Development Bank & Institute of Southeast Asian Studies, 2013)

• Ponciano Intal, Jr., et al., ASEAN Rising: ASEAN and AEC Beyond 2015 (Jakarta: Economic Research Institute for ASEAN and East Asia, 2014)

• Kishore Mahbubani and Fraser Thompson, “Unlocking ASEAN’s Potential,” Project Syndicate (December 2014)

• Prashanth Parameswaran, “Is Indonesia Turning Away From ASEAN Under Jokowi?” The Diplomat (December 2014)

Related Memos:

See our other memos on ASEAN.