New Report Highlights Benefits for Consumers of the ASEAN Economic Community

March 26, 2014

By Véronique Salze-Lozac’h, Arpaporn Winijkulchai, and Ka Wai Wong

With the December 2015 target date for the economic integration of ASEAN fast approaching, last week ADB economist Jayant Menon echoed increasing skepticism as to whether the targets for integration could be met. Meanwhile, questions about the real benefits of an integrated ASEAN Economic Community (AEC) for the citizens of ASEAN countries are on the rise. Consumers still lack a general understanding of how such integration will impact their everyday lives.

Media outlets in Asia frequently report on the pros of the AEC’s goal of creating a single market and production base, with the hope that the AEC will help the region increase its competitiveness by fostering its full integration into the global economy. ASEAN governments also regularly reiterate their commitment to the AEC as a way to ensure more equitable economic development. However, the concrete impact of regional integration on people’s day-to-day lives remains unclear. This is particularly true for consumers and smaller businesses.

While governments and large companies have the capacity to participate in high-level discussions and are the main actors in the process of regional integration, consumers and small- and medium-sized enterprises (SMEs) alike have fewer opportunities to engage and are therefore uninformed of the concrete progress of the process. They are, however, key to the success of the AEC. SMEs are increasingly critical actors of growth in the region. In ASEAN countries, they account for more than 90 percent of all enterprises and employ 50 to 99 percent of the workforce. Their contribution to the total GDP is between 32 and 56 percent in middle-income countries in ASEAN.

To better understand the opportunities and challenges of the AEC for its citizens and its impact on the economies, The Asia Foundation, in partnership with the E-saan Center for Business and Economic Research (ECBER) of Khon Kaen University, conducted a study: “Trade Facilitation and the Cost of Non-Cooperation to Consumers in the AEC,” released on March 14 in Khon Kaen. The study examines past and present trade structures of ASEAN 6 – Thailand, Cambodia, Vietnam, Laos, Malaysia, and Myanmar.

The findings show an increased dependency among the six countries, with the annual export growth of intra-trade of each member ranging from 16 to 35 percent. These countries trade a variety of commodities and commercial items, including raw materials, construction equipment, and machinery. The report estimates there would be a considerable reduction in cost to consumers in ASEAN owing to increased intra-ASEAN trade. Research found that fully modern trade facilitation processes based on the most efficient system of Singapore should reduce the time and cost of land transportation to five days and USD $448, respectively, on average for intra-ASEAN trade between the six countries studied. To transport goods from Vietnam to Myanmar for example, it takes as long as 11 days and costs $7,321 in logistical fees. Improved regional trade would also lead to an estimated GDP growth that varies by countries, ranging from a GDP increase of 0.09 percent for Vietnam (lowest) and up to 2.66 percent for Laos (highest). Regional household income would also grow by 0.11 to 2.82 percent depending on the country. However, despite the potential benefits, it appears that efforts to organize regional supply chains or cluster industries that exploit the comparative advantage of each country remain minimal.

The most common problems identified in the report are clearance, documentation, and processing procedures, as well as informal payments and low skill levels among trade officials. Structural problems such as poor transport infrastructure, lack of competition in logistical services, limited ability to track and trace consignments, and unreliable delivery schedules are also mentioned.

The study makes several recommendations to fully capitalize on a single market and production base, including: improved adoption of up-to-date techniques and procedures for customs; increased training for officers involved in trade facilitation; encouragement of greater competition among logistics providers (such as shipping and warehousing) to lower the cost of logistical services; support to industrial clusters across regional production zones; and better integration of regional value chains.

Making the AEC work for SMEs

To ensure that the AEC can reach its full potential in fostering sustained and more inclusive growth and in enabling some Asian economies to avoid the so-called “middle-income country trap,” more support is needed for SME development. Not only do SMEs play an essential role in job creation, income generation, and domestic or regional investment, they also have the capacity to innovate and develop new products and services that will continue to spur economic growth. It is therefore essential that they are fully equipped to play an active role in the upcoming AEC.

Although the SME sector has proved remarkably resilient, SMEs are also more vulnerable than large businesses to unfair practices and to the lack of transparent and fair regulations and business practices, as shown in a 2012 study by CUTS HRC, “Unfair Trade Practices in Select ASEAN Economies,” which advocated the need to develop effective regulations and enforcement to ensure free and fair market competition in ASEAN.

In a context of this kind, it is no surprise that SMEs reported that they often feel uninformed and unprepared for the upcoming single market. Some may also be worried about unfair competition and the potential disruptive effects of new rules and policies in a single regional market.

These issues will be discussed at a regional forum in Bangkok on March 28 on “Making the AEC work for SMEs.” Hosted by the Thailand Development Research Institute (TDRI) in partnership with The Asia Foundation, the forum, which will be streamed live, will be will feature panels of experts from the public and private sector and representatives from the AEC, and will provide SMEs in different sectors with the opportunity to address compelling issues affecting their business operations in ASEAN. These discussions will help stimulate policy debate and advocate for relevant policy changes for the SME community in ASEAN.

SME development is an important policy area for ASEAN, as outlined in the “ASEAN Policy Blueprint for SME Development (APBSD) 2004-2014.” Raising the level of information of SMEs and supporting their active engagement in policy discussions and consultations with their governments and the ASEAN Secretariat is the best way to help achieve these ambitious objectives for SMEs in ASEAN and ensure that the AEC of 2015 is a region of equitable economic development.

Véronique Salze-Lozac’h is The Asia Foundation’s senior director for Economic Development Programs, Arpaporn Winijkulchai is a program officer, and Ka Wai Wong is the Foundation’s Australian Youth Ambassador for Development, all based in Bangkok. Salze-Lozac’h

can be reached at [email protected]. The views and opinions expressed here are those of the individual authors and not necessarily those of The Asia Foundation.

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