ASEAN Economic Community Prepares for December Launch

by Rachel Wagley and Kaela Mananquil
December 22, 2015

In advance of the December 31, 2015, launch of the ASEAN Economic Community by the Association of Southeast Asian Nations, Rachel Wagley (NBR) looks at the obstacles to full integration that Southeast Asia still faces.

By Rachel Wagley with Kaela Mananquil

December 22, 2015

On December 31, 2015, the Association of Southeast Asian Nations (ASEAN) will launch the ASEAN Economic Community (AEC). The AEC is a monumental effort to integrate Southeast Asian economies by creating a unified, cross-border market and production base. But while the AEC prepares to declare its many successes, Southeast Asia still faces significant obstacles to full integration. Continued economic leadership, which includes ending protectionist regulations and enhancing corporate and political transparency, is critical given Southeast Asia’s importance to the global economy.

Together, the 10 ASEAN countries constitute the world’s seventh largest economy with a GDP of over $2.4 trillion and a population of 600 million people. The AEC’s impressive growth parallels Chinese economic influence in the Asia-Pacific. And Southeast Asia doesn’t share Northeast Asia’s demographic problems: ASEAN has the third largest labor force in the world and isn’t aging at the same pace as more developed countries. This positions the region as a driver of economic growth well into the future.

ASEAN’s trade liberalization measures are greatly benefiting American businesses. All 10 member countries are members of the World Trade Organization, and ASEAN’s trade-to-GDP ratio hit 130% ten years ago. As America’s fourth largest export market, ASEAN bolsters state economies across the United States. By 2013, U.S. goods and services exports to ASEAN supported nearly 499,000 jobs, and trade between the United States and ASEAN soared to $241.7 billion.

Capitalizing on this powerful position, the AEC increases the global competitiveness of the Southeast Asian market and promotes development throughout the region. The AEC allows for the free flow of goods, services, investment, capital, and skilled labor across borders. Freer regional trade and integration greatly benefit Southeast Asia and the global community. But while December 31st is a meaningful marker of the region’s economic ambitions, Southeast Asia still has a long way to climb.

ASEAN member states hold tightly to a wide range of protectionist domestic policies that undermine free trade and investment. Vikram Nehru, a senior associate at the Carnegie Endowment for International Peace, points out unfair “behind-the-border regulations” like excise taxing, licensing, and other measures that protect domestic industries. Nehru writes that Southeast Asia’s score on the World Bank’s services trade restrictiveness index is an astounding “60% higher than the global average” as a result of “opaque and discretionary licensing requirements for service providers.”

Harmful restrictions on the flow of skilled labor are another challenge. ASEAN’s many skilled labor-related mutual recognition arrangements have gone unimplemented. Asian Development Bank Vice President Bambang Susantono writes that domestic policies obstructing cross-border skilled labor mobility are difficult to change as countries compete with each for outside investment. As a result, argues Susantono, ASEAN is experiencing a severe brain drain at direct odds with its labor mobility goals—more than 80% of Thai and Filipino migrants must find work outside of the region.

Many Southeast Asian economies are tarnished by human rights abuses. The region has a sordid history with labor, environmental, and land rights, not to mention corruption. Even more developed countries like Malaysia struggle with slave labor. Economic integration may hurt small-scale land owners by prioritizing export crops and increasing landlessness. Development around the Mekong River has become one of the world’s worst-handled environmental crises.

The AEC does not allow for robust civil society participation or democratic decision making. Even investments from Japan and the United States sometimes take advantage of lax standards around land and environmental impact assessments and human rights. In too many cases, economic achievements have come at the expense of the livelihoods of Southeast Asia’s impoverished populations.

In addition, the AEC has the potential to exacerbate inequality between and within ASEAN countries. Integration won’t change the dynamic of poorer countries providing raw materials and cheap labor to the region’s more developed economies. Burma, Cambodia, and Laos have been given extensions and will not officially enter the AEC until 2018 at the earliest. Burma especially faces daunting barriers to entry, and weak infrastructure, legal frameworks, and political systems in countries like Burma and Laos impede more equitable distribution of the gains of integration.

Despite these problems, ASEAN’s unparalleled economic performance also makes the region one of the world’s most promising. If ASEAN member countries can find ways to deconstruct internal protectionism and repair labor and environmental rights, the region’s integration could bring more opportunities to Southeast Asia. Success in these areas combined with strengthened corporate accountability, political transparency, and increased safeguards for vulnerable populations are the next steps toward genuine economic leadership.

This commentary was originally published by the Hill on December 22, 2015.