Thursday, December 31, 2015

December 31, 2015: Time to Celebrate, Then Get Back to Work, ASEAN

At the stroke of midnight tonight, the ASEAN Economic Community (AEC) comes into being.   There will be no fireworks or concerts tonight devoted to the AEC, unlike the formation of the single market in the EU in 1992 (and definitely not a song like the Kinks’ Down All the Days (to 1992)).    Aside from a few ASEANcrats in Jakarta and elsewhere in Southeast Asia, probably not many people will directly celebrate tonight’s milestone.

Tonight does not mark the end of economic integration in Southeast Asia, nor even the beginning of the end.  Rather, December 31, 2015, represents the end of the beginning of economic integration in ASEAN, a long, often times slow, process. 

Intra-ASEAN duties have been eliminated on virtually all goods through the ASEAN Trade in Goods Agreement (ATIGA), and investment rules have been established through the ASEAN Comprehensive Investment Agreement (ACIA).   This represents significant progress since the early days of ASEAN economic efforts in the 1970s.  In some ways, we already have had an AEC for several years, and tonight only represents its formal recognition.

Granted, implementation of ATIGA, ACIA and other ASEAN agreements has been inconsistent.  Liberalization of trade in services through the ASEAN Framework Agreement on Services (AFAS) will not be completed by the 2015 timeframe.  By any measure, many AEC measures have not been completed as well.  Coupled with other perceived deficiencies in regional cooperation in Southeast Asia (haze, migration, South China Sea/West Philippine Sea, etc.), it is easy to discount ASEAN as an organization.

Yet focusing solely on the negative in ASEAN overlooks the positive achievements of the organization.  The fact remains that ASEAN is the most successful regional organization in the developing world.  No two members of ASEAN have engaged in outright hostilities, despite the long history of conflict in the region: even during the Preah Vihear dispute, ASEAN helped with its resolution.  ASEAN has helped Myanmar return to the global scene.  ASEAN helped with the birth of Timor-Leste (and possibly is part of its future as well).    Finally, ASEAN has provided economic deliverables from ATIGA, ACIA and (albeit incompletely) AFAS, as well as the ASEAN FTAs with Australia-New Zealand, China, India, Japan and Korea.

ASEAN has therefore achieved much, but as the deficiencies indicate, it could achieve so much more.  That is where the ASEAN institutions and/or the ASEAN processes need strengthening and improvement.  Without some relaxation of national sovereignty concerns that will allow for such augmentation of the ASEAN institutions and/or processes, ASEAN will find it increasingly difficult to deal with regional issues of economic integration (whose further progress will require dealing with issues within national economies, not just at the national borders), security, the environment, health and other issues.

Thus, ASEAN, born in the 20th Century, needs to update itself for the 21st Century; the status quo is insufficient to deal with today’s issues.  That is not to say that ASEAN must follow the EU model of strong regional institutions or the NAFTA model of robust processes.  A grouping of relatively young nations with varying legal and political systems will necessarily have to find its own direction.  That process will appear slow and inconsistent, particularly to Western observers, but it will and must take place. Otherwise, ASEAN risks becoming as irrelevant as its predecessors became.

Tonight ASEAN should celebrate both its achievements and its potential.  It and the generations of leaders in the ASEAN governments and institutions who worked on its formation and operations deserve this.  Then the next morning, it will be time to get back to work, for there is much to be done.

Wednesday, December 9, 2015

With AEC in Sight, an Old ASEAN Project Lingers On

The Nation today reported on a controversial power plant being built to power a potash mine in Thailand.  What’s interesting about the dispute is that it involves an ASEAN project that dates back to the earliest days of ASEAN economic cooperation, just as the ASEAN Economic Community (AEC) is about to be launched formally later this month.

The AEC is just the latest iteration of economic cooperation in Southeast Asia, a process that dates back to the 1967 Bangkok Declaration. However, the scope and vision of economic integration has changed over the years. Originally economic cooperation was driven more by the ASEAN governments, rather than the private sector. As such, the priorities of ASEAN governments focused more on collaboration on economic matters to promote social and political stability, rather than economic competitiveness.  This is reflected in the 1976 Bali Concord I declaration, which called for ASEAN members to provide mutual support in food and energy.

This vision was implemented in the ASEAN Industrial Project (AIP) scheme of 1980.  Under the AIP, each ASEAN member would sponsor an industrial project. The host government and its private sector would take 60% shareholding, with the other member governments taking up the remaining 40%.  The output of each project would receive trade preferences for exports to other ASEAN countries under the ASEAN Preferential Trading Arrangements agreement (APTA), and would have exclusivity within ASEAN.

Given these priorities, it was no surprise that the AIP projects focused on agriculture, e.g., food security: Indonesia (urea), Malaysia (urea) and the Philippines (phosphates). Thailand started in soda ash, then changed its project to potash, which is used in the production of fertilizer. Singapore proposed a diesel engine project, which was somewhat related to agriculture since the engines could be used to power agricultural equipment. 

Unfortunately, the APTA and AIP schemes were not successful. APTA failed because it only provided for relative reductions in import duties, rather than absolute reductions (a 50% reduction of a 100% import duty leaves a significant duty in place) and because it only covered a limited number of products (the most infamous being snow removal equipment, useless in a tropical region). 

The AIP scheme was relatively more successful, with Indonesia and Malaysia successfully constructing their urea projects. The Philippine project became caught up in the post-Marcos era political and economic transition, with phosphates being replaced by fertilizer, then pulp and paper, then copper fabrication, then eventually becoming defunct.   The Singapore project was hampered by the reluctance of other ASEAN members to grant exclusivity to the diesel engines (Malaysia, in particular).  Singapore then shifted its project to a Hepatitis-B vaccine production plant, which can in retrospect be seen as inconsistent with the objective of the AIP scheme. More importantly, Singapore deliberately limited its investments in the other ASEAN members’ AIP projects to 1% shareholding to express its discontent with the program.  With other ASEAN members following suit on the basis of reciprocity, the AIP projects began to have funding shortfalls.

Which brings us to the Thai potash project, now called ASEAN Potash Mining Public Company Limited.  After much planning and effort, the company now plans to start mining potash next year, 36 years after the AIP projects were first envisioned.  The local community, however, objects to the construction of a coal power plant to power the mine, suggesting solar or natural gas. The mine’s management says that only its own coal-fired plant can make the mine economically viable.  The local community has resorted to protesting at the embassies of Brunei (which joined the AIP scheme when it became an ASEAN member in 1984), Indonesia, Malaysia, the Philippines and Singapore, because they still have equity in the potash project. 

Without making any assessments on the Thai company’s dispute with the local community, the AIPs in Thailand and elsewhere demonstrate the pitfalls when economic cooperation and integration is driven by government priorities, not market concerns.  A normal business would not take 36 years to come into fruition. Moreover, direct government ownership can bring unwanted criticism, as the Thai dispute illustrates. 

Fortunately, ASEAN economic integration has long since moved away from statist efforts and is based more on market-driven efforts by the private sector.  The continuing struggle of the Thai AIP to bring itself into being is another blast from the past demonstrating that ASEAN governments should support, but not lead, economic integration in Southeast Asia through the AEC.

Friday, December 4, 2015

SEZs Just Another Market Distortion in the AEC

On the sidelines of last month’s ASEAN Summit in KL, Laos Minister of Industry and Commerce Khemmani Pholsena proposed an ASEAN-wide standard for Special Economic Zones (SEZs), stating, “We think that a framework for Special Economic Zones would be good to set up because we see that in each ASEAN member state, we develop different economic zones,” according to the Nikkei Asian Review.  Although not likely to be adopted, it does raise the issue of market-distortive subsidies in the ASEAN Economic Community (AEC). 

SEZs are zones specially designated for investment, usually considered outside the customs territory of the host country. Hence most SEZs have duty-free imports and exports, lighter regulations on labor and establishment, and perhaps income tax exemptions and deferments.  All ASEAN countries have some form of SEZs, and use them to encourage foreign investment into their countries.

The motivating concept of the Laotian proposal is that this competition among ASEAN members disadvantages less competitive countries.  Countries with poorer infrastructure or connectivity, like Laos, have to offer more investment incentives to encourage foreign investment. The downside is that those are the countries that can ill-afford the loss of tax revenue involved in such investment incentives.  Thus, an ASEAN-wide standard for SEZ incentives would help end this “race to the bottom” to outdo each other with such incentives.

Unfortunately, ASEAN has shown very little willingness to address market-distortive subsidy and incentive policies, whether in SEZs and other programs aimed at attracting foreign investment, or in agriculture.   This contrasts with the EU, where the European Commission aggressively targets state aid that supports national industries (although like most jurisdictions maintains its own agricultural subsidy programs).  The Laotian proposal may be an idea whose time has not yet come, but if ASEAN is to achieve a true single market in the AEC, it will need to deal with government subsidy and incentive policies like the SEZs.