Indonesia | Economics

Tuesday, July 27, 2004

ASEAN model inadequate for AEC

(27 July 2004, Jakarta Post)In reading Romeo Reyes' description of The ASEAN model of economic integration (The Jakarta Post, July 19-20), it is hard not to become skeptical over the issue.

Mind you, it is not the benefits of integration that I am skeptical about; I share Reyes's conviction that integration will greatly benefit the region's economies. However, to keep up with developments in global trade, the Association of Southeast Asian Nations (ASEAN) must move quickly, lest regional integration -- and the envisaged ASEAN economic community (AEC) -- be overtaken by events and rendered irrelevant.

This is where my skepticism lies: With the current institutional setup, ASEAN isn't nimble enough to complete regional integration before the concept becomes obsolete. At the heart of this ineptness is ASEAN's reluctance to ensure the commitment of all members, by all means necessary, to its integration effort.

Take the "10 minus X" principle -- an ASEAN principle that allows member countries to opt out of agreements for which it is not yet ready. A country can abstain from joining an agreement for as long as it thinks necessary.

By allowing countries to pick and choose agreements, this principle will hold back the integration process. In addition, integration is unlikely to achieve the single market and production base that underlies the AEC speedily enough, if at all. Other voluntary approaches derived from "the ASEAN way" philosophy will cause similar drags.

But wait: Didn't skeptics previously predict the failure of the ASEAN Free Trade Agreement (AFTA)? And didn't ASEAN prove them wrong by achieving AFTA's tariff goals as scheduled, despite voluntarism? Won't ASEAN do the same with the AEC?

Perhaps -- but not if it thinks, erringly, that the challenges posed by AFTA and the AEC are similar in nature as well as in magnitude. They are not.

The AFTA is mainly about liberalizing tariffs. With trade liberalization, benefits will primarily accrue to the liberalizing country, irrespective of others' actions. A country will gain from opening up its market, even when others close theirs. Hence, the benefits (and costs) of participation (and non-participation) in AFTA are enjoyed individually, and are not shared with fellow ASEAN members.

The AEC is very different from the AFTA. Going beyond liberalization, the AEC aims to exploit the region's strength to attract investment and turn it into a global production base. If the AEC is successfully implemented, with a greater utilization of intra-regional cooperation, ASEAN will, as a whole, be greater than the sum of its parts. Trade and investment will no longer be made on the basis of individual members' strength, but on the region's.

But this is a tall order. To utilize the region's strength, investors must be convinced that the incentives for setting up business anywhere in ASEAN are identical or roughly so, and that costs to move goods within ASEAN are similar and negligible to support an efficient, intra-regional chain of production. Else, investors will exploit the differences in incentives and transaction costs between member countries and undermine the notion of a single production base.

These requirements highlight the institutional challenges of the AEC in comparison to the AFTA. In AFTA, the benefits and costs of participation and non-participation are individually enjoyed; in the AEC, they are shared with other ASEAN members. Worse, sometimes non-participants in an agreement can gain at the expense of participants.

Take, for example, the harmonization of investment incentives. Suppose all members agree to limit tax incentives to a certain level. A member country that exempts itself from this agreement stands to gain by offering incentives beyond the agreed level to lure investors, making it more attractive in relation to the rest. It is not difficult to foresee that everyone else will eventually back out of the agreement.

One way to think about the AEC is to think of it as a cartel. A cartel can only be successful if all members stick to the agreed rules of the game; however, there is an incentive to defect because this will bring added benefits at the cost of non-defectors. Without a mechanism to prevent defectors, it is inevitable that the cartel will fall apart. Voluntarism cannot work for the AEC.

This brings me back to my skepticism of the ASEAN economic integration model. As it stands, ASEAN still relies a lot on voluntarism and does not have effective mechanisms to prevent defections from its agreements -- either in enforcing previous commitments or in ensuring eventual -- and, preferably, immediate -- participation of all members in most, if not all, of its agreements.

This is unfortunate. As in any cartel, ASEAN members stand to gain by forming the AEC rather than going it alone in the fiercely competitive global environment. The AEC will provide its members a competitive edge, as well as increased bargaining power in global negotiations. However, without transparent, rule-based agreements that are vigorously enforced, the ASEAN economic cartel will never materialize.

But who knows? In the past, ASEAN has displayed enough pragmatism to achieve what it set out to do. Let us hope it does just that -- and does it quickly, as time is not on ASEAN's side -- this time around.


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