ASEAN

The ASEAN is a regional trading bloc that began with an “original membership of five states, it expanded to seven in 1995” (ASEAN secretariat, 1997) and now consists of ten member states. As a regional trading bloc they function with collective political, social and economical interests. The success of one nation within the bloc contributes to the strengthening of the entire bloc therefore policies are tailor made and structured to enhance any individual nation benefits into regional benefits. This paper analyses the key dimensions that allowed ASEAN to grow thus far and discusses the challenges that it may face in the future.

One factor that favoured the growth of ASEAN is the GDP growth in member states. In 2015 Malaysia “recorded a growth of 4.6 per cent” (Department of Statistics Malaysia, 2016) and Indonesia a GDP of “5.04 per cent in the last quarter of 2015” (Chilkoti, 2016). The rise in GDP of member states has benefitted ASEAN and is mainly attributed to the “rapid growth of their middle classes”(Hughes and Woldekidan, 1994) and “in 2009 the middle class included 1.8 billion people, with… Asia (525 million) (Pezzini, 2012). A subsequent effect of having a growing middle class leads to consumerism where there is a higher demand for the consumption of goods and services within these countries. As individual countries aim to cater to this rising demand their output will rise causing individual GDP’s to rise as a result. Due to the presence of free trade as the ASEAN member states will trade more with each other causing total ASEAN output to rise as a by product of higher trade volumes. It is evident that the economics successes of individual members will have a growth enhancing effect on the growth of ASEAN.

However this is not always the case as there are income disparities within the ASEAN members so not all countries will benefit equally from having a growing middle class. Such examples are seen where “Singapore and Brunei record the highest GDP per capita while (…the Philippines and Thailand) have only half that.” (OECD, 2013). This explains that the effects of a growing middle class would have uneven effects on different countries because their consumer demand for goods and services will differ and thus their GDP growth. For instance as cited, Singapore has a large proportion of a middle class so their GDP growth is likely to be higher as opposed to the Philippines who has a significantly lower middle class and would therefore have a lower GDP. Such disparities may not actually lead to the growth of ASEAN, as total output is unlikely to rise in the presence of income disparities.

Furthermore, ASEAN as a bloc has been able to grow thus far because they are a large and efficient market that can adjust to prevailing global economic conditions. One way ASEAN achieves this is through their infrastructure that is useful in “binding ASEAN countries closer through infrastructural linkages in transportation, telecommunications and energy” (Ong Keng Yong, 2004). The fact that they have been well connected allows them to maintain efficiency when it comes to the transport of goods between member countries and other global economies despite the large geographical area. This allows for more trade to be facilitated as these countries cater to a range of other countries. Total ASEAN output is likely to increase in times of favourable economic conditions where this is prevailing consumer demand.

In evaluation, it is important to consider the effects to ASEAN in times of unfavourable economic conditions. This was evident during the 2008 global financial crisis. At this time the “economic crisis (has) had an unexpectedly large impact on Asian economies. The GDP growth rate for the region is expected to be a little over one third of the 9.5 per cent growth rate Asia enjoyed in 2007.”(Lamberte, 2009). This displays the dire effects of the exogenous shocks that came about from the West. A root cause was the fact that as incomes fell in many countries, especially in the West for example “the US, consumption is likely to fall well below the 72 per cent share of GDP” (Lamberte, 2009). Consumer demand for imports from Asia declined. Hence there was a fall in trade volumes from ASEAN members to the global economy and thus stunted the ability by which ASEAN could grow further.

Moreover, ASEAN has been able to grow because its member states offer cheap labour and possess abundant natural resources that attract Foreign Direct Investment (FDI) into their countries. Japan is “ASEANS largest source country…with an FDI stock of $180 billion” and the rationale behind this FDI into ASEAN is because they have “extensive production networks and supply chains through out Asia” (Kawai, Thuzar and Hayton, 2016). Therefore it is sensible for Japanese MNC’s to set up in an ASEAN member country because they are able to capitalise not only on the efficient production links but also the free trade zones and cater to the demands of the other ASEAN members. Further, the EU accounted for “24,989.9” see appendix i. (ASEAN, n.d.). This is because the EU outsources their manufacturing chains to the East where it will be more cost effective, as there is not only cheap labour but also highly efficient manufacturing processes in the ASEAN countries. Hence it is clear that ASEAN has been able to grow because inflows of FDIs and MNCs create more employment and as incomes within these countries increase, as does consumer demand. This leads to higher trade volumes and higher output/GDP thus allowing ASEAN to grow.

However it is debatable if these trends of FDI into ASEAN will continue into the future. In the recent past FDI into Africa has been unprecedented with a “65 per cent increase in capital investment in 2014 … the number of FDI projects in the continent rose 6 per cent.” (Fingar, 2015). The rationale behind this recent shift is associated with the vast pools of natural resources that many African nations ow`n such as diamonds, lithium and copper. This makes it a favourable venue for FDI and is consolidated with the availability of low cost workers. Thus it is clear that FDI patterns change over time and is not always reliable to be exceedingly high into a particular country or group of countries.

On the other hand it is important to take into consideration the challenges ASEAN may face if it were to consider expanding in the future. One such challenge is the uncertain political climate most ASEAN countries face that leads to instability within. For example in Thailand the “army chief …declared himself the prime minister “ (Shaffer, 2015) and in Malaysia the Prime Minister “has brought an expansion of repressive laws, multiplying human rights abuses and curbs on media freedoms” (The Guardian, 2016). The evidence portrays that an unstable political climate within a country can be destructive because there is no good governance to steer an economy towards success. This means implementation of incorrect policies can lead to lower than expected GDP growth and thereby causing the success of ASEAN to be undermined and therefore this may pose a challenge to it from future expansion. Similarly, with regards to political instability we can associate Cambodia that was “ranked the worst performing country in Southeast Asia” (Keo, 2013) when it came to the Transparency Index. There may be cases of misappropriation of public funds either to the private sector or to the pockets of the governing elite. In essence the funds used for developing the economy and infrastructure are no longer used for that purpose and may stunt growth rates in countries like Cambodia. Due to the above it is likely to pose a challenge to ASEAN, as it may fear stunt growth rates if it offers other countries membership, where these countries could have unstable political climates as well.

Another encounter ASEAN faces before it expands is the need for structural transformation in several member countries before it offers member ship to others. There is the need to deindustrialise i.e a move from the secondary sector to the tertiary sector. In Philippines the industrial sector “accelerated to 5.5 per cent from 5.4 per cent posted last year… the agricultural sector accelerated to 1.6 per cent from 0.6 per cent” it is also important to acknowledge “the services sector which grew by 5.6 per cent” (Philippine Statistics Authority, 2015). Although countries like Philippines are expanding their tertiary sector there is much more to do be done to expand this sector in their economy. They can make use of their natural attributes and promote tourism on a larger scale in order to enhance the service sector. This is where the challenge lays for ASEAN, it cannot expand further until these structural changes take place and most of their economies develop into a tertiary sector dominant economy. When this takes place these countries will face a higher GDP and their success can be enjoyed by ASEAN as well.

Furthermore, ASEAN faces the challenge of being over dependent on the Chinese economy. “China was the largest individual trading partner (14 per cent share of ASEAN trade)”(Salidjanova and Koser-Weser, 2015) in 2013. This clearly depicts that for ASEAN, China is its biggest import and export partner. The above-mentioned dependence however is not going to benefit ASEAN in the long run in time where China faces economic adversity. “The Chinese economy grew by 6.9% in 2015… slowest growth in a quarter of a century.” (BBC, 2016). In light of this evidence, in times of falling growth and falling income levels demand for ASEAN exports is likely to fall. This will adversely affect the trade balance ASEAN has with China and persistent trade deficits can lead to the slow down of ASEAN economies. Therefore if ASEAN is to expand its membership it ought to reduce its dependence with China as it may impact the ASEAN economy negatively.

Moreover, ASEAN faces a challenge of having too many non-tariff barriers and there is the call to remove them if other countries are to gain access to ASEAN. Non-tariff barriers (NTB’s) refer to trade barriers that are not of tariff origin and usually refer to standards and regulations. Compliance of NTB’s “entails additional costs…(and) disadvantage foreign firms that have a different set of standards”. (Asian Development Bank, 2013). This puts most countries at a disadvantage because subject to these NTB’s their goods become more expensive as they reach the ASEAN market and demand for these imports are likely to be lower as ASEAN consumers prefer cheaper domestic products. The impact to ASEAN will be negative because trade diversification will not take place and other countries may set up similar NTB’s as a form of retaliation. In turn this could result in the fall in the growth rates of ASEAN if demand for their exports fall drastically. Therefore their very stringent NTB’s pose a challenge for ASEAN to expand further and if this is to be considered a viable option their NTB’s should be more lax.

Overall as a regional bloc it is evident that ASEAN needs to adopt a set of structural policies if it hopes to over come the challenges it faces and expand further. Over time it has been able to grow thus far due to the resilience and corporation provided by its member states. As a bloc it has the potential to grow further as South East Asia is becoming a dominant player in the global arena. Although, ASEAN has reached great heights the future is uncertain. This can be attributed to internal divisions and the fact that the international system is constantly changing may pose a challenge to the growth of ASEAN.

By Hashila Fernando

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