Opportunity and Challenges of the ASEAN- Community for its Latecomers

東協經濟共同體對後起四國的挑戰與機會2013/05/31

Deng-Shing Huangdhaung@econ.sinica.edu.tw

Institute of Economics, Academia SinicaYing-Chih, Sun

Institute of Economics, Academia SinicaYo-Yi Huang

Institute of Applied Economics, National Taiwan Ocean University

Compared with other ASEAN countries, Vietnam, Lao PDR, Cambodia and Myanmar opened more lately to external market economies. Based on the observations of trade and FDI relations among the region, in this paper we will address the following issues: How will the ASEAN-Community 2015 affect the 4 countries? Are they ready to join as a single market with other more developed neighboring countries? Can their national business systems—institution, social norms etc. — take the dramatic impacts from a ‘common market’ economic activities. Will they become the next emerging economies (flying geese)? Or become another enclave processing zones? (sitting ducks).

Keywords: FTA, Sub-regional Cooperation/ GMS, Growth Triangle, Financial Turmoil

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1 IntroductionIn the 2003 summit meeting, ASEAN officially announced the plan of forming

the ASEAN Community (AC) in 2020. The year was rescheduled by 5 years earlier to 2015 in the 2007’s Summit. According to designing the 2015 ASEAN Community, there are three pillars: ASEAN Political-Security Community (APSC), ASEAN Economic Community (AEC), and ASEAN Socio-Cultural Community (ASCC). In this paper we focus on the economic aspect of the upcoming community, that is, the role for AEC. More specifically, we will elaborate the likely impact of the AEC on the ASEAN member countries, especially for the four lately opened countries, of Vietnam, Lao, Myanmar and Cambodia.

Clearly the ten member countries of the ASEAN are quite heterogeneous not only in the aspects of institutional regime, but also in the stage of economic development. As one of the ‘four dragons’ in the 1980s, Singapore is far more advanced in economic development than all the other nine countries, and with the 2nd

highest national income in the ASEAN. Brunei’s national income ranks the first in ASEAN for its uniqueness as an oil-rich economy. Malaysia, Thailand, Indonesia and Philippine are named as four-tiger in the late 1980s and early 1990s before the financial crisis burst out in 1997, for its average growth rate of 9% during the period. The other four members, including Vietnam, Lao, Cambodia and Myanmar, are in general with communism or socialism political regime. Being lately open to the rest of the free market world, they are relatively less industrialized, and thus have much lower income.

In brief, the ten members can be categorized into several tiers in the development stage. Singapore the first tier, belonging to one of the flying-geese of the four-dragon, that have followed the leading goose of Japan to receive its declining industries especially the consumer electronics in the late 1960s and early 1970s. Then the four-tiger, that succeed the four-dragon in the early 1980s to launch a highly growth period untill 1997, when the financial crisis occurred. Then, follower is Vietnam, that adopted the economic reform policy in 1986 and by that it has attracted many of the FDI from abroad, which contains those de-investment capital from other ASEAN and China. The last tier goes to Lao, Cambodia and Myanmar in the late 1990s, characterized as socialism or communism with less market efficiency, and less industrialized.

By definition, member countries in an economic community are deeply integrated, not only in free trade but also in free factor mobility. Difference in the stage of development between countries makes better gains from free trade. However, the less development country may encounter the problem of retarding the speed of

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industrialization, for its manufacturing industry is less competitive. Rich in unskilled labor but shortage in capital and technology will make the less-developed economy even worse. Especially under the regime of free factor movement, it is likely that we expect the late comers will attract only those FDI with low skilled production activities.

History does not lack of successful model, that open policy will attract FDI and fuel the engine of growth. A typical example is the NIEs or 4-dragon’s in the 1970s and early 1980s. The NIEs established their own capital and entrepreneurship after having served as the production yard for U.S. and/or Japan’s manufacturing industries.1 On the contrary, the 4-tiger of ASEAN in the late 1980s received FDI from Japan and U.S and even from the former tier of flying-geese of 4-dragon, triggered a economic booming period before the eve of 1997 financial crisis. Unfortunately, the opening up of China then attracted the FDI out of the 4-tiger, and thus damaged the growth of the ASEAN-4 tiger. Clearly, unlike the 4-tiger’s failure, what makes the 4-dragon a success model of opening-up policy is the ability to absorb the technology from the FDI firms, and to establish their own entrepreneurship. Whether the four ASEAN’s latecomers will be benefited from opening-up, especially from joining the upcoming ASEAN economic community is worth studying.

In what follows, Section 2 briefly reviews the history of ASEAN development. Section 3 discusses the four latecomers’ economic reform and its current economic performance. Section 4 analyzes the degree of economic integration from economic statistics. Section 5 discuss the opportunity and challenges for the four lately opened countries. Section 6 concludes the paper.

2 A Brief History of the ASEAN DevelopmentFollowing the so-called East Asian miracle in the 1980s made by the four-dragon

of Taiwan, Hong Kong, South Korea and Singapore, the four-tiger in ASEAN countries, namely Malaysia, Thailand, Philippine and Indonesia, began a fast growing period in the late 1980s. Their average growth rate reached to 8% during the significant booming period from 1987 to 1996, before the financial crisis.2 Thailand’s GDP growth rate even reached the peak of 13.29% in 1988, ranked as the fast growing nation among its neighboring countries, as shown in Figure 1. Ironically, Thailand is also the initiating country to burst out the Asian financial crisis in July 2, 1997. Right after the Central Bank of Thailand’s announcement of not defending its

1 For the flying-geese paradigm model in the 4-dragon and 4-tiger, refers to Huang (1998, 2000a, 2000b),Chen and Huang(2009). For the discussion on the role of FDI for economic development of Southeast Asia refers to Huang (2012). And Song (2008).2 The economic related statistics are based on UNCTAD, unless specified otherwise.

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currency, and the Thai-currency depreciated dramatically by more than 16% in one

day. The currency crisis spread quickly over to his neighboring countries of Indonesia, Malaysia, Philippine and Singapore, and even further to other East Asian countries of Japan, South Korea, and shaking the foreign exchange market of Hong Kong and Taiwan.

As shown in Figure 1, a significant booming period appears during the period from 1985 to 1997. With an optimistic economic future, in the year of 1993, the 5th

ASEAN Summit in Thailand announced to create the ASEAN Free Trade Area (denoted as AFTA hereafter) by the year of 2003. So far so good is it until the outbreak of the financial crisis. The outburst of financial crisis in 1997 enhanced the further movement to have more intensive regional integration. Specifically, following the joining of Vietnam in 1995, the ASEAN expanded by having three new member countries in two years after the financial crisis. That is, Lao became a member in 1997 and Myanmar in 1998 and Cambodia in 1998. By the end of 1998, the ASEAN has already contained ten nations, with more than 0.59 billions of people (9.4% of the world total).

In addition to member expansion in the late 1990s, ASEAN aggressively extends its external economic integration. China, South Korea and Japan were invited to attend the ASEAN Forum in 1998, forming a so-called ASEAN Plus Three (APT) to pursue more comprehensive economic partnership. In 2005, ASEAN announced the plan to recruit more economic partnership countries of Australia, New Zealand and India, that is, ASEAN Plus Six.

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3 The Latecomers’ Reforms and its Economic PerformanceVietnam leads the four late comers in the Southeast Asia, when the government

announced the so-called ‘Doi-Moi’, or economic renovation polices in 1985. Shortly after the open policy, FDI into Vietnam increased sharply. In 1995 when Vietnam joined the ASEAN, the total FDI hit the record high of 10.16 billion US dollar. The inward FDI to Vietnam decreased after the 1997 financial crisis. However it began to surge dramatically after 2003, when China’s new Labor Law effectively raised the labor cost in China.

Next to Vietnam’s open policy is Lao’s New Economic Mechanism in 1990. By the policy, the government began to lift the market regulations, in order to stimulate the economic activities in the private sector. One month after the burst out of the Asian financial crisis, announced in the 30th annual conference on August 11, 1997, both Lao and Myanmar became the new members. The last country joining ASEAN is Cambodia. It was not until April 30, 1999 Cambodia was accepted to become a formal ASEAN member.

According to the national income per capita, the ten member countries of ASEAN can be categorized into three groups. As is listed in Table1, Singapore and Brunei have the highest income level, with 40.07 thousand and 31.80 thousand US dollars respectively in 2011. The 2nd high groups are the 4-tiger, i.e., Malaysia, Thailand, Indonesia and Philippine. The last groups with the lowest national income are the four lately open nations, Vietnam, Lao, Cambodia and Myanmar. And as expected, the earliest opened Vietnam having a high economic growth rate earlier and thus have extremely higher income level than others.

Table 1 Selected Economic Indicators（2011）

ASEANCountry Size （Square KM）

Population(thousands)

GNP per Capita（Current US$）2011/2004/2000

Singapore 700 5,077 40,070/ /Brunei 5,270 399 31,800/ /Malaysia 328,550 28,401 7,760/ /Thailand 510,890 69,122 4,150/ /Indonesia 1,811,570 239,870 2,500/ /Philippine 298,170 93,261 2,060/ /Vietnam 310,070 86,928 1,160/550/291Lao PDR 230,800 6,201 1,040/423/350

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Cambodia 176,520 14,139 750/353/185Myanmar 653,520 47,963 419/na/214Data sources: World Bank (WDI2011), ASEAN Secretariat（2012）

For the four latecomers, their economy has been growing dramatically since 2000, as reflected by the GDP per capita. As shown in Table 1, Vietnam grows by 3.98 times from 2000’s 291 US$ to 1160 US$, that is, 13.43% of the average annual growth rate. Similarly, we observed a double digit growth rate for Lao for the same period from 350 US$ to 1040 US$, or 10.41% of annual growth rate. However, for the other two countries, the economic performance is much lower. Cambodia grows from 185 US$ to 750 US$, or 13.56% and Myanmar from 214 US$ to 419 US$, with growth rate of 6.29%.

Lower income level implies lower wage rate and cheaper labor cost for firms, making the country an attractive site for the foreign direct investment (FDI) in labor intensive manufacturing sectors. The four latecomers of ASEAN are of no exception. In 2003 when China’s labor cost doubled, Vietnam began to receive many multinational firms investment. As a result, FDI in Vietnam surged, and the economy grows sharply. Similarly, we may expect the likely effect occurs to the other threes of Lao, Cambodia and Myanmar.

4. Economic Integration in ASEAN4.1 Intra-Regional Trade in ASEAN

To estimate the barrier toward a economic community, Intra-regional trade is an important index. Theoretically, the more the intra-region trade for the potential member countries as a whole, the more likely they are economically complimented with each other. On the contrary, when the potential member countries relied on trade with the rest of the world, then the regional economic integration by tariff lifting or freeing the factor flows is more likely to be harmful.

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Figure 2 Intra-ASEAN Ten’s Trade Share

The economic integration of ASEAN observed from the intra-region trade share, is depicted as in Figure 2. During the economic booming period of ASEAN in the decade after the mid-1980s, the intra-ASEAN10 increased sharply from about 15.5% to slightly higher than 25%.3 During the recession period after the financial crisis, the intra-regional trade volume decreased significantly from around 24% to 22.25% in 2004. As we can see, the intra-regional import share decreased by greater degree than the intra-regional export share. This phenomenon indicates the region as a whole is running export surplus to the rest of the world. The share then moved upward to the level of 25.24% in 2005 and retains to 26% around afterward. This level is much less than 50%, the intra-Europe trade share the years before EEC was formed. That is unlike the EEC’s path, the economic community for ASEAN would face higher resistance from member countries.

4.2 FDI and Intra-Regional FDI in ASEANIn general ASEAN members are competing with each other for attracting FDI in

the past, and the competition situation seems no sign of changing in the near future. In this regard, the more they are relies on the FDI to stimulate economic development, the fiercer is the competition. This is a negative sign for the moving toward a deeper economic integration for the ASEAN.3 To be statistically consistent, all the ten countries are counted also the four latecomers were not the member during the period.

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The share of FDI to ASEAN, defined as the ratio of total FDI to ASEAN-10 to the world’s total FDI is illustrated in Figure 3. During the economic booming period beginning the early 1990s, we observed the highest share of world FDI into ASEAN. The peak of FDI share, level of 8.85%, appears in 1991, and it remains around 8% before the 1997 financial crisis. Another peak occurred in 2004, counted 4.9%, one year after the effectiveness of China’s wage jumped almost doubled due to its new labor law. After the 2008 world financial crisis, the FDI increased dramatically to 6.36%.

Figure 3 Share of Inward FDI of ASEAN

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Another window to observe the integrated ASEAN is looking at the FDI source, especially the FDI from intra-ASEAN itself, displayed in Figure 4. As depicted in the figure, from period of 1995 to 2005, to the period from 2007 and 2009, the ratio of the FDI sourced from non-ASEAN regions declined, except those from China and India. FDI-source share from EU drops the most from 33.6%to 21.1%. The share from U.S. and Canada dropped during the period from 17.9% to 10.1%, ranked as the 2nd largest decreasing source. On the contrary, we observe a significant increase in the intra-ASEAN FDI, from 11.6% to 15.0%.

Figure 4 Source of Inward FDI in ASEAN

Japan

US & CAN

EU-25

Twn HK & Kor

China,Indo, P

aki、 China

ASEAN-10

0.0%5.0%

10.0%15.0%20.0%25.0%30.0%35.0%40.0%

12.2%17.9%

33.6%

7.2%1.2%

11.6%11.5% 10.1%

21.1%

6.7%3.2%

15.0%

1995~2005 2007~2009

3.3 Intra-Regional FDI country-level (1995~2005)With the most recently available statistics, we can watch the intra-regional FDI

in ASEAN by country level, as illustrated in Table 2. As we can see, Singapore and the other three tigers of Malaysia, Thailand and Indonesia play important role in the region in terms of FDI source. Clearly, Singapore is the major source of intra-ASEAN’s FDI, accounted for 19.58 billion US$ (59.79% of total). Malaysia source accounted for 6.35 billion US$ (19.40%), and Indonesia 3.92 billion US$ (11.97%). These four leading FDI countries are also the highest income countries in the region. Ranking from the receiving country, Malaysia received the most, 26.14% of the region FDI, followed by the Singapore 25.13%, Thailand 19.9% and Vietnam 9.47%, Indonesia 6.46%. Similar to the distribution of world total of FDI to ASEAN, Vietnam received more FDI than others of Indonesia and Philippine. And, the bottom three destination countries of FDI are Myanmar, 3.19%, Cambodia 0.69% and Lao PDR 0.84%.

What is worth noting is that the four-newly opened countries received more FDI than they have contributed to the region. This phenomenon is not surprising for they

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are relatively short of capital as an less-developed and not industrialized country.

3.3 The Development of ASEAN Common Market (ASEAN-EC)As noted earlier, in 2003 the AFTA (ASEAN FTA) was established. Accordingly, the tariff between member countries is reduced to 5% or less. And, in the summit of 2003 summit, the Bali Concord II declared “ASEAN Vision 2020”, to form an ASEAN Community. Three pillars to support the community: political-security, economic, and social-cultural. In 2007, the Summit in Singapore decides to accelerate the ASEAN-Community by rescheduled the effective year from 2020 to 2015. In 2010, ASEAN plus China FTA became effective. As a result, China’s cheap manufacturing goods floods into ASEAN, especially in Vietnam and the Golden Triangle of Thailand-Loa-Myanmar .

(GMS) Initiated by the Asian Development Bank, the so-called Great Mekong River Project was launced in the early 1990 to encourage sub-regional economic cooperation to start-jump the four economies of Thailand, Vietnam, Lao and Cambodia. In 1992, ADB launched the Great Mekong Sub-regional (GMS) cooperation project. In April, 1995 the Mekong River Commission (MRC) was established, with four member countries, Thailand, Lao PDR, Cambodia and Vietnam. According to the project, the Agreement on Sustainable Development for the Mekong Region was undersigned.

In 1996, the MRC invited Myanmar to join. In 1996/06, the 1st Premier Meeting in Malaysia, announced the formation of “ASEAN-Mekong Basin Development Cooperation” (AMBDC). And, China, South Korea and Japan are invited to join the AMBDC. In 2000, the AMBDC became effective, after a Premier Meeting in Hanoi. By the projects of all the GMS projects, the FDI flows into the four less-developed countries, especially to Lao PDR, Cambodia and Myanmar. Not only FDI from the ASEAN member countries, but also from the non-ASEAN countries like China, Japan and South Korea. By the end of 2011, the total investment of AMBDC in Cambodia

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accumulated to 594.629 million US$, of which only 17.88% comes from the host country, according to the ADB’s statistics. Corresponding numbers are 2707 milllion US$ accounted for 5.378% for Lao PDR; 4173 million US$ and 14.319% for Vietnam; 6588 millions US$ and 43.01% for China. Cleary, through the GMS and the AMBDC, the four latecomers are able to receive many FDI for their basic construction. This in turn shall have long term positive impact on their economic growth.

5. Opportunity and Challenges for the latecomersEconomic integration from preferential tariff agreement is the first step. This

occurs to ASEAN 1992, when the CEPT is established. The FTA in 2003 is a step forward, and ASEAN economic community in 2015 is big step, especially for the less developed member countries, like Vietnam, Lao, Cambodia and Myanmar. For the common market requires not only free trade, in terms of zero-tariff and lifting of all the likely non-tariff barriers. For the late comers, the non-tariff barriers are in general more sever and hided under social and cultural norms or business system. It usually take more the adjustment cost to lift off those related regulations or change the business regime.

As the integration advances to common market, then it requires the free movements of factors, including not only the capital, labor and other production factors. For the late comers, they usually will receive capital from other capital rich member countries. The opportunity for the less-developed member countries is clear. In general, inward FDI will fuel the growth engine. This is simply because that capital is needed to jump-start the economic development, and they are short of capital. In addition, there are also externality effects arising from the FDI to the host countries. The positive externalities include mainly the spillover of the production technology from the FDI firms to firms of the host countries. In addition, there is a likely of spill over of the marketing and management skill or know. As a result, it is possible to have the foreign firms to stimulate not only the economic growth, but also to facilitate the nursing of local entrepreneurship, as happened in the NIEs experience in 1980s. The later effect conditions on the human-capital of the host countries, more specifically the education level or the ability of local entrepreneur to learn from FDI companies.

However, it may encounter the outflow of labor, which in the short term may improve the country’s GNP, but in the long run may hurt the country’s sustainability of economic growth. For, labor force outflow can hurt the human capital accumulation in the long run, not to mention the negative effect on the family structure, and thus hurt the demographic healthiness, a long-run damage to the country. In brief, the challenges for the members of less-developed economies may

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arise from several aspects: (1) Being featured with less efficient market-transaction platform (in terms of contract enforcement, fairly open information, blur rule of game, regulation etc.) the spillover effect from foreign firm to local entrepreneur is less likely. (2) FDI brings in capital aiming at using cheaper labor, so the established plant and jobs offered are in general assembly operations, and are thus mostly so-called enclave activities. Therefore, they have little forward or backward linkage to the domestic economy. If this is the case, then the FDI’s contribution to the host economy is of limited and the industrialization will be retarded, not likely to create a long-run growth. (3) In addition, there is so-called pollution import from free trade. Usually the less-developed country has loose environmental protection, either by law or by social customs. In this regard, it is very likely that the FDI comes not only for the purpose of taking advantage of cheap labor, but also for lower cost production-induced pollution. If this is the case, and very likely it is, then the country’s short run growth due to inward FDI may in fact is at the expense of long run sustainability.

6. Concluding RemarksUnlike the highly interdependence situation in condition of countries forming the

European Economic Community (EEC) in the late 1970s, the ASEAN members are relatively more heterogeneous in term of its development. ASEAN has proceeded in a fast speed to economic integration. They established the CEPR in 1992, then ASEAN FTA in 2003, and expected to be a common market in the near future of 2015. More intensive integration implies the fostering of a greater economy, which in turns will attract more the FDI from outside the ASEAN.

The opportunities for the latecomers are there. Sub-regional economic cooperation projects, like GMS and AMBDC, does bring in FDI and thus help raising the less-developed member countries to keep up with the regional development path, especially for the four of Vietnam, Lao PDR, Cambodia and Myanmar. In other words, the opportunities of successful development for the four seem fairly promising, if they can reproduce the experience of NIEs in the 1970 and 1980s.

The history of NIEs can be duplicated here, provided there is enough well-educated human capital to learn from multinational firms. Otherwise, the FDI may just bring in the enclave economy, with mainly the assembly operations. That is, there is challenge for the ASEAN’s last for members. (1) FDI brings in only the enclave production activities. Without human-capital accumulation, the FDI-induced growth cannot be sustainable. Pollution Imports are likely, which is detrimental to the environment and thus make the FDI-induced growth appears only in the short run, but permanently damage the economy in the long run. (3) The national business system,

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including the institution-specific problems and social norms, matters. This will make the adjustment cost extremely higher, when common market becomes effective. In other words, the cultural and social shock is inevitable, and thus may increase the difficulties of transition from state control economy to market economy.

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