Friday, June 15, 2012

The ASEAN Economic Community Needs to Give Priority to the Single Production Base

In yesterday’s Malaysian Star, London School of Economics professor Danny Quah asserts that the ASEAN Economic Community (AEC)’s main priority should be develop the single market in southeast Asia:

Asean needs to realise that it is in a better place location. We think we are part of a global supply chain, where the East is involved in the manufacturing and assembly, while the product is sold to Western consumers.  In the example of the manufacturing of the Apple Iphone, Asia's contribution of the entire value chain is just 4% of the value-added created,” said Quah.

Quah: ‘There is a shift in economics eastward, it is real and will continue.’
“To continue with the Iphone analogy, this would mean that the rise of Asia has only been made up from 4%. If this were true, then Asia' success of the global supply chain would be very fragile.  At the best of times we make 4%.  In the worst of times, we would be making negative returns,” said Quah.
“So if we really held on to that 4% theory, this would not be possible. If the West is not consuming, then who is? The decoupling is actually going on in the world. Asia has a momentum in its economic trajectory that is independent of the troubles of the West,” said Quah.
“The missing link is that we think we make up the 4%. There is a shift in economics eastward, it is real and will continue.  We must adjust our mental mind map. We must take greater responsibility. We need to be more innovative and develop domestic demand in our own markets,” said Quah.

Now, I do not doubt that Asia, and by extension, ASEAN, needs to develop its domestic markets.  Empowering the Asian consumer is a positive thing, particularly in China and India.  Stronger consumer markets in China and India not only will help support the world economy, but empowered consumers in those countries will demand higher quality, better distribution and more efficiency. 

However, unlike China and India, ASEAN neither operates fully as a single market nor has the institutions to regulate a single market.  This blog has consistently argued that a single market needs a single regulator, or at least have sufficiently coordinated regulators that can provide consistent and clear regulation for the single market. 

Yet the ASEAN Charter notes that the aim of the region’s economic integration is to “create a single market and production base which is stable, prosperous, highly competitive and economically integrated” in paragraph 5 of Article 1. The “single market” and the “single production base” are correctly identified as two separate concepts in the Charter: (1) the “single market” for goods, services, labor, investment and capital, and (2) the “single production base” which would supply ASEAN products for consumption not just in ASEAN but for export to elsewhere in the world. 

In my opinion, the ASEAN Charter inverted the significance of the AEC’s integration goals.  Given the economic disparities among ASEAN members, both in terms of development and size, a single market alone will not necessarily provide sufficient economic benefits for the populace. The income gap between the ASEAN member with the highest GDP per capita (PPP), Singapore, and the ASEAN member with the lowest GPD per capita (PPP), Myanmar, remains at 50:1. By contrast, the ratio in the EU of its highest GDP per capita member, Luxembourg, and that of its lowest, Bulgaria, is only approximately 7:1. Furthermore, the majority of ASEAN’s population are in countries classified as LDCs. 

Unlike the EU, therefore, achieving a single market should not be viewed as the end objective of economic integration. Rather, like NAFTA, integration through the AEC should be viewed as a means to an end.  Establishing a more effective, harmonized production base through AEC measures will encourage foreign and domestic investment in ASEAN, with the resulting products both consumed within ASEAN and exported abroad. The general population in ASEAN will benefit to the extent that increased investment results in higher employment, wages and overall development.   ASEAN leaders appear to understand this aspect of economic integration, as denoted by their repeated calls for greater involvement by SMEs and ASEAN-owned businesses in regional integration.  Without improved participation by this sector of ASEAN’s economy, the benefits of regional economic integration will remain concentrated in limited segments of the economy that have already integrated, such as automobiles and electronics.

Thus, for political purposes, the creation of the single market is noted as the primary goal of AEC integration, in practical terms, the creation of the single production base will have the more immediate impact on ASEAN’s citizens.  If the AEC is to have a material effect on the citizens of ASEAN, it would make more sense to build the production base, then attract foreign investors who will hire ASEAN citizens and put funds into the local economy.  Given the disparity in economic development and market sizes, giving priority to development of the single market would mean a much longer roll-out process with less economic impact on the region.

Hence I have posited that attracting investors to a single production base in ASEAN requires improved monitoring, administration and implementation of AEC measures.  This, in my view, is best served by improving predictability and clarity in the operations of the ASEAN institutions.