Unit 4 Macro: ASEAN - Trade and Economic Growth

 Economist Anthony Beaumont considers how the deeper economic integration within the ASEAN single market can act as a stimulant to economic growth and development for member nations

The CIMB bank, based in Kuala Lampar, serves as an exemplar of how the ASEAN single market can bring about economic growth. At the heart of its strategy is an emphasis upon expanding to overseas markets. Of similar importance to the CIMB is serving clients from its existing markets as they look to both invest and travel across the region. For example, tourists of course require ATM services. Thus CIMB was the first bank to build out a pan-ASEAN network of these. As a result of the interwoven nature of the ASEAN single market, the CIMB has a presence in every ASEAN market bar Laos. In other words, the bank is growing by supporting the bottom-up integration of the ASEAN single market.

Thus in this way, the ASEAN single market allows for the trade neurons of this region to become even more interconnected. Ergo member countries can exploit comparative advantages and benefit from efficiency gains. In a region dominated by the gargantuan presence of China, an ASEAN market is necessary to challenge this reign and to embark upon integrating their economies in order to create an EU-style economic community in Southeast Asia.

Indeed according to a recent survey by Ernst and Young, China emerged as the world’s ‘most attractive investment destination.’ As such the single market can provide the ASEAN with the basis upon which to build an arsenal of trade links to challenge China’s dominance, allowing its countries to use their own comparative advantages and make themselves magnets for investment and growth in the process.

Firstly, economic integration can bring with it gains in competitiveness. According to Denis Hew, Senior Fellow at the Institute of Southeast Asian studies, this is mainly through cheap labour costs. This is in turn lowers production costs and thus allows industries to gain competitive advantages.

These competitive advantages allow profitable niche markets to emerge, thus encouraging growth. For instance Malaysia uses the ASEAN bloc to dominate the tourism sector, with 13.6% of its workers being employed in this industry.

The lack of a single market previously for trade in the ASEAN arguably led to its decline from being the world’s most attractive FDI destination. Between 1970 and the late 1990s, the ASEAN led this table, until being eclipsed by China. In the Philippines alone, several multinational corporations had started to relocate their operations to China. Perhaps the most apt example of this would be FedEx’s decision to move its Asia-Pacific hub from Subic in 2009 to Guangzhou, China. This was on account of cheaper labour and access to an economy which is much bigger than the combined economies of the ASEAN.

Yet the rise of the ASEAN trade bloc has reversed this trend. The ASEAN trade bloc is now providing firms with cheaper labour. Chinese wages are rising as living standards and in turn the cost of living increases. The plethora of cheap labour in the ASEAN thus brings a fantastic opportunity for investment and growth. For instance according to the Export-Import Bank of Korea, Korean companies invested a combined $2.3 billion in China last year. This was only $300 million more than the $2 billion investment into the ASEAN.

An example of companies investing in the ASEAN due to its labour would be underwear manufacturer BYC. It is currently building a 40,000 square meter factory in Jakarta, Indonesia. A company official recently said that it decided not to expand its China plant, but instead to build a new factory in the Southeast Asian country, so as to take advantage of its cheaper labour costs.

Another major underwear producer GOODPEOPLE, which currently has a plant in Cambodia, also has no plans to invest in China. One spokesman said, ‘it costs a lot to produce goods in China....we might pay Chinese workers $100 a month, for instance, while we only need to pay $30 in Cambodia. We plan to expand our Cambodia plant and export goods to China, Korea and other consumer markets.’ Lower unit labour costs thus allows these underwear firms to gain comparative advantage in the market to both their and their nation’s benefit.

Furthermore, the ASEAN brings trade growth through the breaking odwn of trade barriers, encouraging free movement of goods, capital, services, and labour. This enables competition. Competition allows producers to independently satisfy consumer demands. Due also to rivalry, it nudges firms to become efficient producers to stay profitable. Competition also compels producers to continually innovate and develop their products as part of the constant battle for sales. A company which has exploited this liberalisation of trade in the ASEAN is the massage-chair manufacturer OSIM, who have 600 stores worldwide. Since 2009 they have had 25% year on year growth due to increasing wealth in the ASEAN.

The ASEAN market also provides the opportunity for deregulation of the economy. As an example, the Philippines ailing telecommunications sector was transformed in the 1980s into one of the country’s success stories in regulatory reforms. This policy was crucial in transforming the Philippines into the leading IT and BPO services provider which it is today.

Lastly, sticking with the Philippines example, its National Economic and Development Authority Director, General Ruperto Majuca, says that when the ASEAN becomes fully integrated in 2015, he expects the Philippines to benefit from higher exports and FDIs. Since economic integration will create an environment without trade barriers, it will be easier for the Philippines to sell its products to its ASEAN neighbours. Indeed, the Philippines could take advantage of ASEAN’s rising prosperity to increase its exports’ value. This indeed favours the goal of Department of Trade and Industry Secretary Gregory Domingo to more than double the country’s exports value which currently stands at $51.5 billion as of 2010 to $120 billion in 2016.

The ASEAN single market promotes economies of scale, whilst at the same time facilitating the development of industries. An East Asian single market would strengthen the influence of the region in the global political economy by threatening to refuse a state access to the single market. If necessary Furthermore, a single market in East Asia would become a ‘magnet’ of political and economic stability, just as the EU has done in Southern and Eastern Europe and is currently doing in the Eastern Mediterranean. As suggested by the Economist, all of these factors cement the view that the ASEAN single market will provide a hot-bed for economic growth in the next few years, with its share of the global economic pie expected to rise to 4.5% by 2017, and keep rising thereafter.