Asean Integration 2015

December 2014 | www.bloombergbriefs.com

The Association of Southeast Asian Nations has set Dec. 31, 2015 as its target date for regional economic integration — including a single market and production base with the free movement of goods, services, investment and skilled labor, and the freer flow of capital. Bloomberg Brief assesses Asean’s progress so far, with scorecards for member states and a look back to similar endeavors in Europe and North America. The Asian Development Bank also provides a reality check on the project with on-the-ground insights.

ASEANINTEGRATION

2015A PROGRESS REPORT

December 2014 bloombergbriefs.com Bloomberg Brief | Asean Integration 2

CONTRIBUTORSTAMARA HENDERSON is a Ph.D econo-mist with buy- as well as sell-side experi-ence, covering G-3 economies and the emerging markets over a span of 25 years. She has focused on FX and rates strategy over the past 12 years and has accumulated a strong track record for her trade ideas. Ta-mara is a CFA charterholder and the author of ‘Fixed Income Strategy: A Practitioner’s Guide to Riding the Curve,’ published by Wi-ley. She contributes to the Economics Asia Brief, which is a daily newsletter provided to Bloomberg clients and subscribers.

IWAN AZIS has been a professor at Cornell University since 1992 and was director of graduate studies at the Regional Science Program and adjunct professor at the Johnson Graduate School of Manage-ment before he took a leave of absence to head the Asian Development Bank’s Office of Regional Economic Integration (OREI). He has conducted research and consulting work for various international organizations, governments and universities, and pub-lished numerous books and articles on cur-rent development issues, the latest of which is “Managing Elevated Risk: Global Liquidity, Capital Flows, and Macroprudential Policy — An Asian Perspective” (Springer).

TARGET 2015 Deliverables for next year. 3

ASEAN BY THE NUMBERS How Asean stacks up against its peers. 5

BRUNEI Scorecard of Asean’s top oil exporter. 6

INDONESIA Scorecard of Asean’s largest population. 7

MALAYSIA Scorecard of Asean’s largest local currency bond market. 8

PHILIPPINES Scorecard of Asean’s largest household spender. 9

SINGAPORE Scorecard of Asean’s richest member. 10

THAILAND Scorecard of Asean’s automotive hub. 11

CLMV COUNTRIES Scorecard of Asean’s newest members. 12

IMPLEMENTATION REALITY Bloomberg Brief talks with Iwan Azis, head of the Asian Development Bank’s Office of Regional Economic Integration. 13

INTEGRATION PRECEDENTS Insight from the European Union and Nafta. 15

PROGRESS BENCHMARKS How Asean is on track to reap the rewards of integration. 17

CONTENTS

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GoodsTo facilitate the free flow of goods across national borders, Asean is eliminating tar-iffs and non-tariff barriers, harmonizing standards and integrating customs clear-ance. Import duties on all products, exclud-ing “sensitive” and “highly sensitive” items, are to be removed by the end of 2015 and tariffs on sensitive items are to be reduced to no more than 5 percent. All non-tariff barriers are to be dismantled by 2015, with the CLMV countries — Cambodia, Laos, Myanmar and Vietnam — given some “flexibility” in implementation until 2018.

Asean has already achieved significant progress in tariff reduction. The average tariff rate across the region fell to 3.87 per-cent in 2000 from 12.76 percent in 1993, when the Asean Free Trade Agreement was launched. The Asean-6 countries (Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand) achieved 60 per-cent tariff elimination in 2003 and Vietnam achieved the same in 2006. Tariff rates for more than 96 percent of traded goods

TARGET 2015 TAMARA HENDERSON, BLOOMBERG ECONOMIST

Continued on next page…

Seven years ago, the Association of Southeast Asian Nations set 2015 as the target date for the establishment of the Asean Economic Community. The original target was 2020, set in 2003 as the region emerged from the Asian financial crisis.

Asean, with its combined population of more than 600 million, is being transformed into a single market and production base. Integration will make Asean economies more dynamic and competitive. More harmonized standards, procedures and regulations will reduce busi-ness costs, attract investment and lift living standards.

There are three other mutually reinforcing pillars which form the foundation of Asean integration. The second pillar is the creation of a com-petitive economic region using competition policy to create a level playing field. Consumer protection, intellectual property rights, infrastruc-ture development, taxation and e-commerce are other aspects of this pillar. The third pillar of the Asean Economic Community is equitable economic development aimed at reducing development gaps in the region. This goal encompasses the development of small and medium-sized enterprises, technical assistance and capacity building programs. The fourth pillar is Asean’s integration into the global economy, including a more coherent approach toward external economic relations and strengthening linkages to the global supply chain. The focus of this supplement is Asean’s creation of a single market.

among the Asean-6 countries today are virtually zero, according to Asean.

An integrated customs facility for Asean is scheduled for implementation by 2015, when each member’s National Single Window will be linked. Asean’s single electronic customs window will stream-line information collection and processing, which in turn will expedite customs clear-ance, reduce costs and boost competi-tiveness. Individual NSWs in Asean-6 are already up and running. Vietnam launched its NSW in April 2014. Myanmar plans to introduce its NSW by 2016.

ServicesServices providers across Asean will be largely unrestricted in the provision of services and establishment of compa-nies across national borders. Restrictions on all services sectors are to be substan-tially removed by 2015, with the liberal-ization of air transport, e-Asean, health care and tourism having the highest prior-ity. Arrangements for the mutual recogni-

tion of professional qualifications are to be completed by 2015.

Within the financial services sector, integration will continue beyond 2015 as measures will be consistent with national laws and appropriately paced to suit the level of development of individual mem-bers. For example, the Asean-6 countries are focusing on enhancing insurance and capital market services by 2015, while Cambodia, Laos and Vietnam are working toward liberalizing their banking sectors.

InvestmentAsean seeks to achieve “free and open” investment with minimal investment restric-tions by 2015. To this end, members are working to increase investor confidence in the region. This includes strengthen-ing dispute settlement mechanisms that enhance investment protection; conclud-ing bilateral agreements to avoid double taxation; strengthening provisions for the repatriation of capital, profits and dividends; and adopting international best practices.

Moving Toward a Single Market

WHO? WHY?WHAT?Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam

Single market and production base with the free movement of goods, services, investment, skilled labor and the freer flow of capital

Increase competitiveness, narrow development gaps and improve resilience against external shocks




Asean members are also working to increase the transparency, consistency and predictability of investment policies, by har-monizing rules and simplifying procedures where possible. A one-stop investment por-tal, investasean.asean.org, is already pro-moting Asean as an integrated investment area and disseminating investment rules, regulations, policies and procedures.

LaborThe free flow of skilled labor will allow Asean businesses to increase productiv-ity and will benefit individuals by enhancing job opportunities. Asean is working to facili-tate the issuance of visas and employment passes for the region’s professionals and skilled labor engaged in cross-border trade in goods, services and investment, as allowed by prevailing national regulations. Cooperation among Asean universities is to be enhanced, with increased mobility for students and staff within the region.

CapitalTo promote the freer flow of capital, which will increase the appeal of the region as an investment destination, Asean is harmonizing capital market stan-dards in the areas of debt issuance, dis-closure requirements and distribution rules. To broaden the investor base, the region’s withholding tax structure is being enhanced. Market-driven exchange and

TARGET 2015…Continued from previous page

Construction workers labor on a building in the business district in Jakarta, Indonesia.Photo: Dimas Ardian / Bloomberg

debt market linkages are facilitating cross-border capital raising. The removal or relaxation of restrictions on current

account transactions, where appropriate and possible, will increase capital mobility, as will further capital market development.

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BRIEF

Source: Asean




Asean countries have a combined GDP of $2.4 trillion, rivaling the size of some of the largest economies, such as the U.K.’s at $2.5 trillion. Per capita income in two of Asean’s wealthiest members, Singapore and Brunei, surpasses the U.S. and Germany and is about double the U.K.’s. The combined foreign currency reserves of Asean excluding Brunei are $766 billion, a store of wealth topped only by China. Growth in Asean’s less developed economies — Myanmar, Laos and Cambodia — surpasses China. Integration will further expand the region’s economic base, growth potential and investment appeal.

ASEAN BY THE NUMBERS

POPULATION (Millions)CHINA

INDIA

ASEAN

EU

NAFTA

ASEAN-6

EURO-12

1,361

1,243

612

506

ECONOMIC SIZE (USD Trillions)NAFTA

EURO-12CHINA

U.K.ASEAN

ASEAN-6INDIA

AUSTRALIASOUTH KOREA

INDONESIATHAILANDMALAYSIA

SINGAPOREPHILIPPINES

NEW ZEALAND

19.856

12.674

9.469

2.523

2.410

2.157

1.877

1.506

1.304

FX RESERVES (Billions)CHINA

ASEAN*ASEAN-6

SOUTH KOREANAFTAINDIA

SINGAPOREEURO-12

THAILANDMALAYSIA

INDONESIAU.K.

PHILIPPINESAUSTRALIA

VIETNAMNEW ZEALAND

MYANMARCAMBODIA

LAOS

3,888

766

716

354

291

288

264

168

153

124

106

74

70

38

37

16

7

6

0.7

0.387

0.313

0.298

0.272

0.182

INCOMES (GDP per Capita PPP)SINGAPORE

BRUNEIU.S.

AUSTRALIAGERMANY

NAFTAEURO-12

U.K. NEW ZEALANDSOUTH KOREA

MALAYSIATHAILAND

CHINAASEAN-6

INDONESIAASEAN

PHILIPPINESINDIA

VIETNAMLAOS

CAMBODIAMYANMAR

78,74471,759

43,550

43,15837,457

36,20934,227

33,14023,298

14,39011,904

11,4399,559

9,378

* Excludes Brunei, for which data are not available Source: Bloomberg

3,042882

6,5335,4105,2934,812

ECONOMIC GROWTH (Real GDP % YoY)MYANMAR

LAOSCAMBODIA

CHINAINDIA

VIETNAMMALAYSIA

PHILIPPINESASEAN

INDONESIANEW ZEALANDSOUTH KOREA

AUSTRALIAU.K.

SINGAPORENAFTA

ASEAN-6EURO-12

THAILAND

8.38.0

7.47.3

5.35.6

5.7

5.05.0

3.93.2

3.13.1

2.82.3

1.30.7

0.6-1.8

5.6

BRUNEI

0.870

53,143

43,332

— Tamara Henderson, Bloomberg Economist

470

449

320




Brunei is the largest net exporter of oil liquids in the Asia-Pacific region, according to the U.S. Energy Information Administration. Crude oil and natural gas production account for 60 percent of the sultanate’s national income and 90 percent of exports. Brunei accounts for less than 1 percent of intra- and extra-Asean goods trade and attracts a neg-ligible share of Asean’s FDI inflows — also less than 1 percent of the total. The growth in services exports has lagged average performance in the Asean-5, which comprises founding members Indonesia, Malaysia, the Philippines, Singa-pore and Thailand. Deeper integration with Asean may help diversify the economy.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$ M

illio

n

Extra-Asean Imports Extra-Asean Exports Intra-Asean Imports Intra-Asean Exports Brunei Total Goods Trade

GOODS AND SERVICES

BRUNEI

95%The increase in Brunei’s services exports in nominal USD terms between 2005 and 2011, according to the latest Asean statistics.

INVESTMENT

CAPITAL

-500

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2001 2003 2005 2007 2009 2011 2013

Total ASEAN Extra-ASEAN Intra-ASEAN

Net FDI Inflows, $ Million

-2

0

2

4

6

8

10

12

14

16

2001 2003 2005 2007 2009 2011 2013

Intra-ASEAN Extra-ASEAN Total ASEAN

Net FDI Share of Asean Total, %

■ FOREIGN EQUITY: Full ownership is allowed, except in the case of activities related to national food security and those requiring the use of local resources.

■ FOREIGN EXCHANGE: There are no foreign exchange controls.

■ REPATRIATION: Foreign banks are required to obtain prior approval before the repatriation of capital or profits.

Source: Asean

Source: Asean

Source: Asean — Tamara Henderson, Bloomberg Economist




Indonesia has a population of 248 million, the fourth-largest in the world and Asean’s largest. The archipelago of 17,508 islands, with a combined land area of 1.8 million square kilometers, attracts the largest share of intra-Asean foreign direct investment inflows, about 40 percent of the total in 2013. The country’s exports to other parts of Asean accounted for just 12 percent of the region’s total — among the lowest in the Asean-5 — while services growth has been the slowest in this group of founding members. Lower intra-Asean flows for goods and services trade suggest potential gains from deeper integration.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$ M

illio

n

Extra-Asean Imports Extra-Asean Exports Intra-Asean Imports Intra-Asean Exports Indonesia Total Goods Trade

GOODS AND SERVICES

INDONESIA

60%The increase in Indonesia’s services exports in nominal USD terms between 2005 and 2011, according to the latest Asean statistics.

INVESTMENT

CAPITAL

-5,000

0

5,000

10,000

15,000

20,000

2001 2003 2005 2007 2009 2011 2013

Total Asean Extra-Asean Intra-Asean

14,000


-20

-10

0

10

20

30

40

50

60

2001 2003 2005 2007 2009 2011 2013

Intra-Asean Extra-Asean Total Asean


■ FOREIGN EQUITY: Up to 100 percent foreign equity ownership is allowed with a number of exceptions and conditions noted in Presidential Regulation No. 36/2010.

■ FOREIGN EXCHANGE: Foreign customers may buy foreign exchange from a bank without an underlying transaction for a maximum of $100,000 per party per month. The corresponding limit for derivatives is $1 million without an underlying transaction.

■ REPATRIATION: Law No. 25/2007 guarantees the right to transfer capital, after-tax profits, certain costs and compensation in the event of nationalization.

Source: Asean

Source: Asean

Sources: Bank Indonesia, Deloitte, KPMG — Tamara Henderson, Bloomberg Economist




Malaysia has Asean’s largest local currency bond market and is the largest issuer of Islamic bonds. Malaysia attracts about 10 percent of Asean’s total FDI inflows, a share that has been relatively stable over the last decade. The share of extra-Asean FDI inflows has been steady, while the share of intra-Asean inflows has been volatile and declined sharply after the global financial crisis. Malaysia’s share of exports to the rest of Asean, which was 19 percent in 2013, has been steadily declining since 2002, in contrast with rising or stable shares for the rest of the Asean-5.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$ M

illio

n

Extra-Asean Imports Extra-Asean Exports Intra-Asean Imports Intra-Asean Exports Malaysia Total Goods Trade

500,000

GOODS AND SERVICES

MALAYSIA

84%The increase in Malaysia’s services exports in nominal USD terms between 2005 and 2011, according to the latest Asean statistics.

INVESTMENT

CAPITAL

2001 2003 2005 2007 2009 2011 2013

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2001 2003 2005 2007 2009 2011 2013


4,000


-10-505

1015202530354045

2001 2003 2005 2007 2009 2011 2013


12


■ FOREIGN EQUITY: Some industries are closed to foreign investment due to excess capacity, raw material shortage, public safety, health and national security reasons.

■ FOREIGN EXCHANGE: Non-residents may convert foreign currency to ringgit or vice versa with licensed onshore banks for the purchase of ringgit assets or for the repatriation of funds linked to ringgit investments.

■ REPATRIATION: Non-residents are free to remit divestment proceeds, profits, dividends or any income arising from investments in Malaysia.

Source: Asean

Source: Asean





The Philippines has the largest proportion of private consumption to GDP in Asean, with household spending account-ing for 67 percent of GDP. Services exports rose 241 percent between 2005 and 2011, the largest gain in Asean, thanks to strong performance in business processing outsourcing. The archipelago has untapped mineral wealth valued at more than $840 billion by the CIA, yet attracts the lowest share of intra- and extra-Asean FDI among the Asean-5 mem-bers — all of which are investment-grade. This discrepancy suggests scope for significant gains from deeper integration.

0

25,000

50,000

75,000

100,000

125,000

150,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$ M

illio

n

Extra-Asean Imports Extra-Asean Exports Intra-Asean Imports Intra-Asean Exports Philippines Total Goods Trade

GOODS AND SERVICES

PHILIPPINES

241%The increase in the Philippines’ services exports in nominal USD terms between 2005 and 2011, according to the latest Asean statistics.

INVESTMENT

CAPITAL

2001 2003 2005 2007 2009 2011 2013

-1,000

0

1,000

2,000

3,000

4,000

2001 2003 2005 2007 2009 2011 2013


70,000

Net FDI Inflows, $ Million 2001 2003 2005 2007 2009 2011 2013

-2

0

2

4

6

8

10

12

2001 2003 2005 2007 2009 2011 2013



■ FOREIGN EQUITY: Up to 100 percent foreign equity ownership is allowed except in areas identified in the Regular Foreign Investment Negative List. Enterprises with more than 60 percent exports have fewer restrictions. Some non-Filipino companies must reduce the foreign ownership share to less than 40 percent within 30 years.

■ FOREIGN EXCHANGE: Foreign exchange may be purchased subject to specific requirements. Residents may purchase foreign exchange under $120,000 without approval from the Bangko Sentral ng Pilipinas.

■ REPATRIATION: BSP-registered foreign investments are entitled to full and immediate repatriation of capital and remittance of profits, dividends and other earnings which accrue thereon using foreign exchange sourced from the Philippine banking system.

Source: Asean

Source: Asean

Sources: Asean, Bangko Sentral ng Pilipinas — Tamara Henderson, Bloomberg Economist




Singapore is Asean’s wealthiest member, with per capita income of $36,900 compared with $5,100 for the rest of Asean excluding Myanmar and $7,900 worldwide. It also attracts the largest share of extra-Asean FDI (55 percent of the total inflow in 2013). The city-state is home to Asia’s largest financial center (No. 3 worldwide) and is a strategically-located shipping hub with the second-largest container port in the world. Singapore’s more open and developed economy means that it has fewer action items to complete for integration.

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$ M

illio

n

Extra-Asean Imports Extra-Asean Exports Intra-Asean Imports Intra-Asean Exports Singapore Total Goods Trade

GOODS AND SERVICES

SINGAPORE

134%The increase in Singapore’s services exports in nominal USD terms between 2005 and 2011, according to the latest Asean statistics.

INVESTMENT

CAPITAL

2001 2003 2005 2007 2009 2011 2013

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2001 2003 2005 2007 2009 2011 2013



0

10

20

30

40

50

60

70

80

90

2001 2003 2005 2007 2009 2011 2013



■ FOREIGN EQUITY: Foreign ownership is unrestricted with some exceptions. A 40 percent limit is placed on foreign ownership of locally-incorporated banks.

■ FOREIGN EXCHANGE: There are no foreign exchange controls.

■ REPATRIATION: Resident individuals and corporations are free to move funds, import capital or repatriate profits without restriction.

Source: Asean

Source: Asean





Thailand is Asean’s automotive hub, exporting almost 2.5 million vehicles in 2013, the ninth-largest shipment volume in the world, according to the International Organization of Motor Vehicle Manufacturers. Extra-Asean FDI inflows have recovered from the global financial crisis, while intra-Asean FDI inflows remain well below pre-2008 levels. Services exports doubled in nominal U.S. dollar terms between 2005 and 2011, the second-fastest pace in the Asean-5, though a tentative service-sector reform agenda, including outdated activities for liberalization, will damp integration benefits.

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$ M

illio

n

Extra-Asean Imports Extra-Asean Exports Intra-Asean Imports Intra-Asean Exports Thailand Total Goods Trade

GOODS AND SERVICES

THAILAND

110%The increase in Thailand’s services exports in nominal USD terms between 2005 and 2011, according to the latest Asean statistics.

INVESTMENT

CAPITAL

-2,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

2001 2003 2005 2007 2009 2011 2013



-10

0

10

20

30

40

50

60

70

2001 2003 2005 2007 2009 2011 2013



■ FOREIGN EQUITY: Equity requirements are listed in the Foreign Business Act of 1999. Foreigners may engage in certain enterprises if more than 50 percent of the capital is owned by Thai nationals. Majority foreign ownership is permitted for companies promoted by the Board of Investment when exports are at least 50 percent of sales.

■ FOREIGN EXCHANGE: Purchase of foreign currency from authorized banks is generally allowed upon submission of documents indicating underlying international trade and investment. Thai baht transactions by non-residents without underlying trade and investment are limited to prevent speculation.

■ REPATRIATION: Outward remittances of amounts properly due to non-residents are permitted for items of a non-capital nature such as service fees, interest, dividends, profits or royalties, provided that supporting documents are submitted to an authorized bank.

Source: Asean

Source: Asean

Source: Bank of Thailand — Tamara Henderson, Bloomberg Economist




Asean’s newest members — Cambodia, Laos, Myanmar and Vietnam — are also the region’s least developed. CLMV countries joined Asean between 1995 and 1999 compared with 1967 for the original signatories. Per capita income is $1,410 on average in CLMV, compared with $19,550 for the other members.

CLMV’s development gap means more physical and institutional infrastructure needs to be built, which presents a much larger work program to complete for seamless integration. A spring-board for CLMV countries is the integration process itself, includ-ing intra-Asean investment inflows and technical assistance. As CLMV members benefit from an accelerated development process, Asean-6 investors are well-placed to capitalize on the rewards from CLMV’s dynamic growth.

CLMV COUNTRIES

MYANMARCHALLENGES: Managing multiple transitions (from military regime to democratic process, from centrally-planned to market-oriented economy, and from conflict to peace in border areas).

ASSETS: Mineral wealth, advantageous location between China and India, size.

LAOSCHALLENGES: Building international reserves, taming excessive credit growth and reducing a large fiscal deficit (near term); ensuring wealth from natural resources benefits all (long term).

ASSETS: Natural resources (timber, agricultural land, hydropower and minerals).

VIETNAMCHALLENGES: Enhancing monetary and fiscal policy credibility (near term); completing transition to market-based economy (long term).

ASSETS: Low poverty rate, infrastructure (95 percent of population has access to electricity, 90 percent of the population is connected by all-weather roads), natural resources.

CAMBODIACHALLENGES: Reducing dollarization (near term); improving governance and effectively managing land and natural resources (long term).

ASSETS: Natural resources.

Sources: Central Intelligence Agency, IMF, World Bank — Tamara Henderson, Bloomberg Economist




With the Asean Economic Community’s December 2015 deadline looming, how much further does the region have to go? Iwan Azis, head of the Office of Regional Economic Integration at the Asian Development Bank, spoke with Bloomberg Brief’s Justin Jimenez to weigh in on its progress.

Q: Which aspects of the AEC are showing the most progress? Which are showing the least?A: The most progress — which I think is the really key success of Asean in general — has been with the fourth pillar, integration into the global economy. Before the Asian financial crisis, Asean was an open economy inviting investors, as well as trading with all kinds of countries, including industrialized countries. So the fourth pillar has basically been achieved.

The most difficult aspect is a component of the first pillar, which is about creating a single market and production base. Asean has been very successful in participating in the region’s production networks. Many countries either produce intermediate goods that will be processed in countries outside of Asean or export primary goods including natural resources. But when it comes to services, that has been more difficult for two reasons. First, Asean has only had a short history in terms of liberalizing the services sec-tor. Throughout the history of Asean’s trade liberalization, which began in the late 1970s when it introduced Preferential Trade Agreements, very few PTAs have touched upon the services sec-tor; most of the discussion has been about goods. Second, when it comes to services, it’s rather difficult to grasp what the implica-tions are for individual countries.

Q: You mentioned goods and services. What about integration in terms of labor, investment and capital?A: Let’s start with labor. This is related to the difficulty in liberalizing services. So far, Asean is doing okay in terms of unskilled labor. There is already a lot of labor movement within the region, but that’s mostly unskilled. It gets difficult when you get to the mobility of skilled labor. There’s reluctance on the part of some countries. So far what they’ve done is introduce certification for skilled labor. But there are still problems in terms of how to expand the list of labor qualification categories and how to make the certification process easier. Keep in mind that most Asean countries are emerging and becoming middle-income countries. That means the requirement for skilled labor is there, but the supply may not be there yet. Since they are trying to tap their own existing pool of skilled labor, they don’t want early com-petition from other countries.

In terms of investment, Asean has been relatively open, but in the past most foreign investments were coming from outside Asia. Then, in the early 2000s, Asean began to experience a lot of foreign investment from neighboring Asian countries, the “Plus Three” — Korea, Japan and China. In the last few years, investors from within Asean have started to invest in other Asean countries. If we want to make a prognosis on what’s going to happen in the next few years, I think this trend will continue, but I am inter-ested in observing the nature of the investments. Suppose there is a Korean investment in the Philippines. They won’t be investing using U.S. dollars or foreign currency, but Philippine pesos — for-eign investment, but operating with local currency.

Q: How long will those integration initiatives take?A: I am pretty optimistic that it’s going to happen quite soon and

quite fast. One piece of evidence that I have seen in the bond market is the Asian Bond Market Initiative. The Asean Plus Three governments, in the early 2000s, came up with this new initiative, and asked the ADB to help with the implementation.

One of the initiatives that the ABMI is cur-rently working on is the Asean Plus Three Multi-Currency Bond Issuance Framework, or AMBIF, which aims to use local curren-cies for foreign investments. For example, if you are in Korea you should be able to get bonds in Thai baht without difficulty in order to invest in Thailand. Imagine the alterna-tive. If Korean investors have to borrow from domestic banks in Thailand, the Thai banks would not treat them the same as Thai bor-rowers. There would be some distinction in terms of the conditions. They are still foreign investors to them — of course banks don’t have full information about these investors. The point here is that it’s not going to be easy if there are no facilities to provide local currency to those prospective investors.

IMPLEMENTATION REALITY

Asean’s ‘Real’ Work Comes Post-2015


A Thai national flag flies while containers sit stacked near gantry cranes at the Port of Bangkok.Photo: Dario Pignatelli / Bloomberg




Q: How are the AEC’s harmonization of standards and the single customs window progressing? What are the challenges?A: For the single window, it has been stipu-lated that it will be achieved by December 2015. I am quite optimistic that at least for the Asean-5 (Indonesia, Malaysia, the Phil-ippines, Singapore and Thailand) it’s going to happen. That will facilitate a lot in terms of trade. When you talk about trade liberaliza-tion, it’s not just about tariffs, but also trade facilitation — the administrative procedures, the customs clearances, etc. So the single window will definitely make the flows easier.

But it takes time. It’s not going to be 100 percent by December 2015, but I think it’s moving in that direction. It’s almost like the case of tariffs. At the beginning it’s only 70 percent, but slowly it becomes 100 percent.

The harmonization of standards is a bit more difficult compared to the single window. They are moving in that direction, but I think it will be slower. When it comes to harmoniza-tion, you have to deal with both domestic reg-ulation and, in some cases — this is the most important — national constitutions. That comes down to domestic politics. So I think it will take a longer time for the full harmonization.

But partial harmonization is already there. I can give you an example. There is an association among the Asean stock exchanges that is improving the harmonization process for Ase-an’s equity markets. For Filipino investors who want to buy shares of a company in Thailand, for example, it will be easier because this group provides the necessary information. But that is only up to a certain point. When it touches some sensitive issues — domestic regulations, the constitution — that will take longer.

Q: What sectors do you see as more difficult to harmonize?A: The sectors that are considered sensitive. Take the banking sector, and the Qualified Asean Bank criteria. In one country in Asean, the banking liberalization is close to 100 percent, meaning that any foreign banks — not just from Asean — are free to enter. This liberalization was an outcome of the Asian financial crisis in 1997. Whereas in other Asean countries, that isn’t the case. So that is not a level playing field.

If you force banking liberalization in a system where there isn’t a level playing field, you’re bound to have losers and winners. Asean doesn’t want that. Then, you have to talk about whether the banking sector is considered a strategic sector, you have to change domestic rules and regulations. And then in each coun-try they may have a point in the constitution that strategic sectors should be protected and treated differently in order to be used for the welfare of the domestic population. When it touches that kind of thing, it gets more difficult.

Q: Dec. 31, 2015 is the deadline. What happens afterward? A: That’s the most important thing — what happens afterward.

First, the real work comes post-December 2015. That is the moment that everybody has to make their work concrete. The good thing about AEC is that even though it’s not going to be achieved 100 percent, everybody is talking about 2015 — not just the government, but also the private sector. The tone now is ‘Oh my God, it’s just around the corner.’ This deadline was set up in 2007, but they’re only now realizing it. So it’s good, everybody has started to improve their efficiency.

The second thing is that the day after 2015, their main task is to reduce any uncertainty. We see the AEC 2015 as a journey rather than a destination. That journey is to move toward a more open Asean. But getting from zero to 70 percent is easier to achieve than from 70 percent to 100 percent. You’re starting to touch on the most difficult sectors. For those remaining sectors, they have to provide some sort of certainty in terms of, for example, what the future tariffs are going to be.

The third thing is related to infrastructure and reducing the cost of trade. By building infrastructure, transport costs will be reduced, for example. Harmonization will also be easier.

Lastly, to me, what is important in any integration and coop-eration effort is trust. This is the reason why I really like the name Asean Economic Community — they use the word ‘community.’ It goes beyond just economics. It goes beyond trade, investment, capital, exports and imports. There is a human or people compo-nent to it. That is key. Unfortunately, not many people realize this because they’re measuring the success or failure of integration by the standard, tangible economic data. But trust is everything. And that is the major challenge for Asean post-2015: how do you build that trust?

This interview has been edited and condensed.

IMPLEMENTATION REALITY…Continued from previous page

Customers use automated teller machines outside the Maybank branch at the company’s headquarters in Kuala Lumpur, Malaysia. Photo: Charles Pertwee / Bloomberg




As Asean countries work diligently to build a single market, the integration experiences in Europe and North America provide useful yardsticks for investors to assess the potential impact of the Asean Economic Community. Intra-regional trade and investment flows, as well as per capita incomes after inflation, rose sharply for most European Union and North American Free Trade Agreement members within the first five years of integration — though the net impact on economic growth has more been moderate.

The effect of integration is difficult to capture because of other simultaneous influences on economic activity. Measurement is further compli-cated by an incremental integration process that takes place over a number of years. There are also dynamic impacts from improved produc-tivity and intangible benefits from peace dividends and greater resilience to external shocks, which tend to be omitted from quantitative studies.

The integration process is a long and winding road, as witnessed across Europe, North America and, now, Asean. Though progress can seem painstaking and piecemeal, experience suggests the benefits not only accumulate, but can be sustained over time.

INTEGRATION PRECEDENTS TAMARA HENDERSON, BLOOMBERG ECONOMIST

Experiences in Europe and North America Foreshadow Gains in Asean

EU: Impacts After SEA and Euro Launched, Selected Members

country without having to obtain a work permit or local technical accreditation.

The Maastricht Treaty in 1993 set in motion the creation of a single currency. Twelve members adopted the euro, which was launched on Jan. 1, 1999. Between 1995 and 2004, membership in the re-named European Union more than dou-bled. Eighteen countries now use the common currency.

ECONOMIC IMPACT The EU has delivered on its peace objec-tive and has helped raise the living stan-dards of its members. In the five years after SEA was implemented, the per capita income of EEC members in constant U.S. dollars rose by 1.9 percentage points more than the world average increased. Income per capita in the three years after joining the EU rose 32.5 percent on average from the three years before membership for countries joining the EU after 1995.

For the countries that joined the EU between 2004 and 2007 — the Czech Republic, Hungary, Poland and Roma-nia — average per capita income in the


European UnionBACKGROUNDEurope’s integration process began in the 1950s. Coming in the wake of the Second World War, the aim was to secure lasting peace through economic interdependence. The initial economic partnership among six member states of the European Eco-nomic Community has evolved into a polit-ical union spanning 28 countries.

The EEC was transformed into a cus-toms union in the 1960s and gradu-ally added new members. By the 1980s, membership had doubled to 12 countries, yet high unemployment and lagging pro-ductivity growth plagued the region. This state of “eurosclerosis” was blamed on excessive government regulation and small fragmented national markets for labor and capital.

The European Commission responded with the Single European Act of 1986, which led to widespread changes — including the abolition of border controls, the recognition of product standards of other members, the harmonization of tax codes, the ability to shift funds from one country to another without capital controls and the ability to work in another member

YEAR OF EU ENTRY >>

BELGIUM 1952

FRANCE 1952

GERMANY 1952

PORTUGAL 1986

SPAIN 1986

U.K. 1973

SAMPLE AVERAGE

WORLD AVERAGE

5-Year Period After Single European Act Implemented (Dec. 31, 1992)GDP Per Capita – Constant $ % Change 8.7 5.0 3.9 9.9 9.4 19.9 9.5 7.6Real GDP YoY PPT Change 4.8 3.0 1.5 1.3 3.0 2.0 2.6 1.8Investment – % of GDP PPT Change -1.1 -2.5 -2.2 -0.8 -0.8 1.1 -1.0 0.1

5-Year Period After Euro Launched (Jan. 1, 1999)GDP Per Capita – Constant $ % Change 8.7 7.4 5.6 7.0 13.7 14.5 9.5 7.9Real GDP YoY PPT Change -0.1 -1.7 -1.0 -6.0 -1.4 1.1 -1.5 1.5Investment – % of GDP PPT Change -1.8 0.5 -4.0 -4.6 3.9 -1.5 -1.2 -0.8

Source: Bloomberg Note: Denmark, Greece, Ireland, Italy, Luxembourg and the Netherlands are excluded due to missing Eurostat data.

EU: Comparison of Five-Year Average Before, After Membership Against the World

GDP Per Capita – Constant $Percentage Difference

Annual Real GDP Growth Percentage Point Difference

Annual CPI InflationPercentage Point Difference

-0.7 CZECH REP.-2.9 HUNGARY

-3.4 POLAND

CZECH REP. 0.7-3.1 HUNGARY

POLAND 0.2-2.2 ROMANIA

CZECH REP. 138HUNGARY 110POLAND 122ROMANIA 128

Note: The Czech Republic, Hungary and Poland joined the EU in 2004. Romania joined in 2007.

Source: Bloomberg

ROMANIA 0.1




five years after membership increased between 18.9 percent and 24.3 percent compared with the five years prior to membership; this was more than twice the world average at the time.

Economic growth after inflation tended to increase more for EEC mem-bers than the world average in the five years after SEA was implemented. Real

GDP growth in the three years after join-ing the EU was 1.7 percentage points higher on average than in the three years prior to membership for countries joining the EU after 1995. Individual country per-formance was quite varied. GDP growth even contracted in some cases.

Growth in the Czech Republic and Poland in the five years after EU member-

ship outpaced the world average, though growth in Hungary and Romania under-performed global peers.

Unencumbered access to the EU’s market of 500 million consum-ers coincided with a drop in consumer price inflation for these countries that exceeded the average decline in world CPI.

INTEGRATION PRECEDENTS…

NaftaBACKGROUND The North American Free Trade Agreement has created a single market among the U.S., Canada and Mexico — with a com-bined GDP equivalent to 27 percent of the world’s output and a population base of 470 million. The deal, which went into effect on Jan. 1, 1994, gradually eliminated all tariffs and most non-tariff barriers on goods produced and traded within North America. Some tariffs were eliminated immediately, while more sensitive sectors were phased out over a span of up to 15 years.

Nafta included provisions on rules of origin, foreign investment, intellec-tual property rights protection and dis-pute resolution. The treaty liberalized a broad range of service sectors, instituted national treatment for cross-border ser-vices providers and guaranteed fair, trans-parent and non-discriminatory treatment of investors and their investments.

ECONOMIC IMPACT U.S. trade with Canada doubled in the first decade after Nafta went into effect, even though the U.S. and Canada had implemented a free trade agreement five years beforehand. U.S. trade with Mex-ico increased 522 percent between 1993 and 2012, compared with a 279 percent increase in trade with non-Nafta coun-

tries, according to the U.S. Congressional Research Service.

Cross-border investment also surged. The stock of U.S. foreign direct investment in Mexico rose 564 percent to $101 billion and the stock of U.S. FDI in Canada quadrupled between 1993 and 2012. During the same period, the stock of Canadian FDI in the U.S. rose 458 percent, according to the CRS.

Per capita income in the U.S. and Canada increased by more than the world average after Nafta was implemented — 14.1 and 13 percent, respectively — while this metric of living standards lagged for Mexico in the five years after Nafta was signed. Average economic growth after inflation in the five years after Nafta’s implementation increased by 1.8 percent-age points in Canada and 1 percentage point in the U.S. compared with average growth in the five years preceding Nafta — both above the world average of 0.1 per-centage point. In Mexico, growth slowed by 0.3 percentage point. During the same period, inflation dropped by 14.3 percent-age points in Mexico compared with a decline of 2.4 percentage points in Can-ada, a drop of 1.5 percentage points in the U.S. and a decrease of 4.5 percentage points on average across the globe.

In a research review of Nafta’s impact after 20 years, the CRS in April concluded

that the agreement “did not cause the huge job losses feared by the critics or the large economic gains predicted by supporters.” The smaller effect on GDP can be attrib-uted to a number of factors. For one, Nafta was implemented five years after the U.S.-Canada Free Trade Agreement went into effect and when U.S. tariffs on most Mexi-can goods were already low. In addition, the final aspects of the pact were not fully implemented until Jan. 1, 2008 as Nafta allowed tariffs to be phased out over a 15 year period. Also, cross-border activity after 2001 was damped by tighter border security after the Sept. 11, 2001 terrorist attacks and there was increased competition from Chi-nese exports after Beijing joined the World Trade Organization in December 2001.

Nafta’s net impact on U.S. employ-ment is still under debate, though there seems to be agreement that the opening of the market increased export-related jobs — which pay an average of 15 to 20 per-cent more than those oriented toward the domestic economy, according to the CRS. The expansion in Mexico’s economy cor-responded with a plunge in both legal and illegal immigration from Mexico to the U.S., according to a Pew Hispanic Center report.

Sources: Bloomberg Brief, Congressional Research Service, Europa

% CHANGE IN GDP PER CAPITA – CONSTANT $

PPT CHANGE IN ANNUAL REAL GDP GROWTH

PPT CHANGE IN INVESTMENT AS A % OF GDP

PPT CHANGE IN ANNUAL CPI INFLATION

U.S. CANADA MEXICO WORLD U.S. CANADA MEXICO WORLD U.S. CANADA MEXICO WORLD U.S. CANADA MEXICO WORLD5 Years On: Dec. 31, 1993 - Dec. 31, 1998

14.1 13.0 6.5 8.7 1.7 1.8 2.1 0.3 2.5 2.6 2.8 0.0 -1.4 -0.8 6.2 -13.510 Years On: Dec. 31, 1993 - Dec. 31, 2003

25.0 26.9 8.3 17.3 0.1 -0.4 -1.1 1.9 1.3 2.1 3.0 -0.7 -0.7 0.9 -5.2 -15.520 Years On: Dec. 31, 1993 - Dec. 31, 2013

36.2 37.9 23.7 35.6 -0.5 -0.3 -1.5 1.1 -1.0 5.7 2.6 1.4 -1.5 -0.9 -5.9 -15.4Comparison of 5-Year Average Before and After Membership

9.2 5.1 6.0 5.1 1.0 1.8 -0.3 0.1 0.4 -1.2 -0.8 -1.0 -1.5 -2.4 -14.3 -4.5Source: Bloomberg

Nafta: Gains From Agreement




POLITICAL WILLThe aim of economic integration is an important motivator for policy making in the face of resistant vested interests in favor of the status quo. For the European Community, economic interdependence was seen as a means to enhance security, putting a stop to frequent wars in the region. For Mexico, Nafta was a means to transform the economy after a devastating debt crisis in the 1980s. The Asian financial crisis (1997-98) and the global financial crisis (2008-09) helped steel Asean’s resolve to integrate faster in order to increase members’ resilience against external shocks. Hence, Asean members have a strong motivation to integrate, similar to the EU and Nafta countries.

ECONOMIES OF SCALEIntegration allows businesses to more seamlessly tap into a larger pool of labor, capital, suppliers and customers. Also, intra-regional imports and extra-regional exports tend to have higher domestic content, so that domestic firms ben-efit from another member’s exports inside and outside of the group. Asean has a larger population base than EU and Nafta members. It has a wider development gap among its members and trade is a larger share of the economy for most members. Hence, Asean nations may reap larger rewards from integration than the EU and Nafta countries, especially as incomes in the poorer members start to rise.

EXTRA PROVISIONSLike the EU and Nafta, Asean is making changes that go beyond the scope of a free trade area’s elimination of tariffs and non-tariff barriers. The AEC also encompasses services, investment protections, intellectual property rights and dis-pute resolution, among others. The similar depth of planned integration measures gives Asean members compa-rable potential to EU and Nafta countries.

FLEXIBILITYAsean’s integration plan includes exception lists and allows for the gradual removal of barriers, similar to Nafta and the EU. Even today, after more than 60 years of liberalization, not all goods, services, money and people move freely across EU member borders. With Nafta, only tariffs on “qualifying goods” were eliminated and services liberalization measures have exclusions and reservations by each country. Nafta’s harmonization of regulations and liberalization of services have lagged markedly. Hence, Asean members face similar hurdles to integration as the EU and Nafta countries.

Asean’s integration plan has a number of similarities with aspects of the EU and Nafta experiences. This overlap means that the eco-nomic impacts from these regions — namely, increased trade and investment flows within the integration area, higher per capita income, stronger growth and lower inflation — can be applied as benchmarks to assess Asean’s progress in interlinking its economies.

Still, there are a number of key differences between Asean’s circumstances and ambitions and those of the EU and Nafta — the num-ber of members, the degree of the development gap across members and the scope of political aspirations. This means the degree of impact and pace of progress may be different for Asean members. While Asean’s wider development gap presents higher hurdles for implementation, it also means the potential benefits of integration are that much larger.

PROGRESS BENCHMARKS TAMARA HENDERSON, BLOOMBERG ECONOMIST

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Asean Integration 2015

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