Opportunity knocks with the rise of the ASEAN ecomonic zone



By Martin Conboy

aseanAs the economic power of the world shifts towards Asia away from the traditional   epicentres of Europe and the USA we will soon see the development of The ASEAN Economic Community (AEC). It is due to come into existence in 2015.

This exciting new market and mega economy will emerge on Australia’s doorstep with the aim of promoting the economic growth of the ten member nations of ASEAN (the Association of South East Asian Nations).  As well as the tremendous opportunities for growth and development, these nations will also face significant challenges.

What will this new trading bloc mean to the rest of the world.

The ten member states of ASEAN, dominated by Indonesia, have over 600m people and by 2018 it is expected  that their  combined economies will be growing as fast as China’s and will be as big as Germany’s.  In this ‘Asian Century” this is globally significant, it’s a super economic zone  that has a major implications for the growth, diversity and development of the Outsourcing and BPO industries.

The formation of AEC was prompted by the dominating size and growth of the Chinese and Indian economies. China and India each present as single markets and production bases with national laws and regulations[1].

ASEAN is a group of ten smaller diverse economies separated by different tariffs, customs, product standards and regulations, not to mention the market is fragmented by different legal systems, industrial structures, the anti-competitive practices of local firms, and inadequate connections between national infrastructures.

To become more attractive to investors, be able to compete against its two major competitors (China and India) and improve its prospects for economic growth, ASEAN embarked on the path for closer integration with the ultimate goal of forming the ASEAN Economic Community (AEC) in 2015.

The aims of the ASEAN Economic Community (AEC)

The AEC aims to transform ASEAN into a region with free movement of goods, services, investment, skilled labour, and a freer flow of capital. AEC envisages the following key characteristics[2]:

  • a single market and production base,
  • a highly competitive economic region,
  • a region of equitable economic development, and
  • a region fully integrated into the global economy.

In 2007 a blueprint was established for cooperation on a number of key areas including human resources development, recognition of qualifications, closer consultation on macroeconomic and financial policies, trade financing as well as enhanced infrastructure and communications across the region.

The challenges



For foreign investors doing business in the region can be exceedingly difficult. A key problem for foreign firms is the varying welcomes they receive across the region: Indonesia recently increased the restrictions on foreign investors in retail and banking, while in Vietnam—despite a generally welcoming government—foreign firms have been the target of violent protests.

ASEAN has numerous strengths to draw upon that could allow it to play a much larger role on the global economic stage, taking advantage of the respective strengths of each of its member nations. But the challenge lies in how to integrate the newer members of ASEAN, while bridging the social and development gaps between the individual states as they move towards closer integration.

Greater efforts are required, particularly in the areas of poverty, family planning  and human capital development to narrow development gaps in the region. Cecilia Reyes, chief investment officer of Zurich Insurance Group commented recently, that it is difficult to imagine how integration could happen in a region that includes the mature economy of Singapore and less developed countries like Laos and Myanmar.

The six most advanced ASEAN economies (Brunei, Indonesia, Malaysia, The Philippines, Singapore and Thailand) should address the common challenges of improving their capacity to provide the education, relavent training  and job skills that will be needed to develop greater productivity, the knowledge economy  and technology-intensive industries[2]. The fostering of inclusive growth and greater resilience to natural disasters and climate change are also becoming increasingly important priorities.

For the less developed economies of Vietnam, Cambodia, Myanmar and Laos, sustainable development of natural resources and agriculture are key priorities. They also need to focus on strengthening institutional capacities for preserving macroeconomic and financial stability. Clearly corruption will need to be addressed if business confidence is to be underscored.

Each individual country has its own individual advantages and challenges it needs to overcome. Though abundant in natural resources such as oil and gas, Indonesia needs to improve access to education and the development of its human capital. The Philippines, the BPO and outsourcing powerhouse, needs to maintain sustainable job growth and address poverty issues and family planning  in regional areas

Paulius Kuncinas, Asia regional editor of the Oxford Business Group on June 26 said at this year’s Asian  Business Conference “2015 Approaching.” The Asean is “a very efficient and very ambitious trading bloc but it somehow got stuck on the path of reaching full economic integration.”

Kuncinas said two factors hampering the transition are the divergence of cultures, a major factor in the shift and the inability of the “elite” to sell or explain the benefits of the integration to other stakeholders. If the concept is to be a success then the poor and disavanatanged must be brought along and be able to participate in the gainshare.

The rest of the world



Other countries and foreign investment are certainly keeping an eye on opportunities in the region. ASEAN has surpassed Australia, the US and Russia to become the fourth-largest destination for China’s outward investment and is China’s third-largest source of foreign direct investment.

Bruce Alter, Head of Global Trade and Receivable Finance, HSBC, highlights, “In 2012, China invested USD4.42 billion in ASEAN economies, up 52 per cent in a year. By the end of 2012, Singapore had become the destination where Chinese companies invested most, followed by Cambodia, Myanmar, Indonesia and Laos, according to the China-ASEAN Business Council”.

“In the coming decade, Beijing is set to deepen economic links and integration in ASEAN, focusing on increasing direct investment and building infrastructure, especially roads and high-speed trains”.

Economic and trade relations between ASEAN and Australia have steadily expanded in the past years, where two-way merchandise trade between ASEAN and Australia was valued at US$ 67.9 billion in 2013.

Foreign Direct Investment (FDI) from Australia to ASEAN grew by 11.1 per cent, from US$1.8 billion in 2012 to US$2 billion in 2013. With a share of 1.67 per cent of total inward investment to ASEAN in 2013, Australia is the seventh largest source of FDI of ASEAN.

As the ASEAN market forms and the economies for the respective states grow there will be an increasing demand for agricultural products, natural resources and the development of the services sector, which offer Australian companies numerous opportunities in the coming decades to expand into this large and fast growing economic bloc.

Improved infrastructure and communications, greater cooperation between state economies, greater effort developing human capital and alleviating poverty, including family planning should make ASEAN more attractive for foreign and investment. And combined with its current low costs should see it becoming more attractive for the BPO-IT and outsourcing industries, with the Philippines leading the pack.

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August 5, 2014

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