THERE is no gainsaying that the failure of the recent Asean Foreign Ministers Meeting to agree on a communiqué was a debacle that dealt a body blow to Asean's credibility as a regional organisation. Nevertheless, as Asean celebrates its 45th anniversary, it is important to view the body in an overall perspective: Some setbacks notwithstanding, Asean is making progress and its ongoing integration will have major implications for businesses over time.
Asean is not united, but that is not new
Asean is neither a unified entity nor does it have ambitions for the "ever closer union" that are entrenched in the European integration project. Asean was set up with the far more mundane objective of bringing the nations of the region closer together so that they would, firstly, avoid conflicts and, secondly, engage in economic cooperation that would be mutually beneficial. From the beginning, the strategy was to do all this in a gradual manner that would be in sync with the wide differences that characterise its members. While it would be nice if Asean members prioritised their relationship with each other over the alliances and friendships with others, it is not realistic to expect that to be the case right now.
Thus it was that Asean came to a point where Cambodia, as chair of the Foreign Ministers Meeting, could not bring itself to agree to a communiqué that would even mildly irritate its ally China — upsetting its other Asean allies in the process. A week later, following Indonesian intervention, a ministerial statement was indeed issued, one that represented a consensus, albeit a weak one, among all Asean countries.
The episode highlighted Asean's weakness in terms of widely divergent perspectives on key issues such as the role of China, but Asean also has some strengths that allow it to recover from such setbacks. The most important of these was the skilful diplomacy and leadership that Indonesia provided to help smooth over the differences and keep Asean on track. Another factor in Asean's favour is that the big powers are keen to secure Asean's friendship — China, the US and Japan are eager to improve their standing in Asean while other powers such as India, Russia and South Korea are also more engaged than before. This gives Asean much more influence.
Many positive developments, especially for businesses
While Asean's political achievements may be disappointing, its economic dimensions are gaining traction and there is a case for saying that Asean's economic moment has come.
First, as a whole, Asean will enjoy a tremendous demographic dividend in the coming decade. The fast growing and young work force in large countries such as Indonesia, Vietnam, the Philippines and Myanmar stand in contrast to the ageing populations in China, Japan and much of East Asia and the developed West. This makes for more dynamic labour inputs into the growth process and a rapidly growing consumer market that will increasingly attract foreign investors.
Second, Asean is set to gain a greater competitive advantage in raising its export market share while securing a larger share of foreign direct investment flows:
• China is moving up the value chain as wages and other domestic costs rise sharply and the real value of the renminbi appreciates. This is stimulating a growing relocation of labour-intensive activities to countries in Southeast Asia such as Vietnam, Indonesia and Cambodia where labour costs remain relatively low and whose currencies are competitive.
• The world's largest corporations went through an adjustment in the period from the mid-1990s onwards when they realised that they had too small a share of their foreign investment in China: They therefore focused most of their new overseas investment in China, bypassing Asean, which had been their previous favourite. Now, a decade and a half later, much of this adjustment has been made, as most global corporations now have an optimal allocation of investment in China within their overall portfolio. As a result, flows of foreign investment into Asean are set to rise again, boosting growth prospects. Recent data points to a surge in foreign investments in Indonesia, Thailand and Malaysia. Encouragingly, we are seeing a growing number of medium-sized Japanese and South Korean companies shifting manufacturing activities to the region.
Third, there are rising synergies from economic integration. It is very easy to be cynical about Asean's economic integration efforts — the reality on the ground has generally not matched the soaring rhetoric of initiatives such as the Asean Free Trade Area (Afta), for example. There certainly have been disappointments but there are also some positive trends emerging that suggest that Asean will benefit from increased synergies from economic integration:
• Asean is working towards an Asean Economic Community (AEC) that would address the weaknesses in the Afta and bring about greater intra-regional flows of trade, capital and skilled labour. Learning from previous integration efforts, it has drawn up a detailed list of targeted tasks, which each Asean country must meet and each country's performance is reported. This has resulted in a higher degree of compliance with the AEC integration process than in previous Asean integration efforts. The AEC process obliges each Asean member to go beyond the tariff cuts of the Afta to address bottlenecks in a whole range of sectors that impede economic integration. While the AEC may not achieve everything it has set for itself by 2015, the cumulative impact of all these incremental reforms will be powerful over time in promoting more flows of trade and capital in the region, opening up substantial new opportunities for businesses.
• In addition to this region-wide, top-down economic integration, there are other sub-regional integration efforts, which are also helping to weave the region closer together. The Iskandar Region in southern Johor, for example, will bring Singapore and Malaysia closer together — this initiative is making considerable progress and will reach critical mass this year. In addition, the Greater Mekong Sub-Region is also making headway after a decade of efforts to build transportation connectivity and overcome other barriers to trade.
The bottom line
In the end, the critical test of Asean integration is whether companies change their strategy to operate as if Asean is indeed more integrated. Indeed, corporate behaviour supports the view that Asean integration is real. In the past few years, a number of banks in the region have made a big push to convert themselves from national banks to Asean banks — CIMB Malaysia, Malayan Banking and DBS Bank of Singapore are examples. But it is not just banks that are doing this. AirAsia clearly sees itself as a regional carrier, not just a Malaysian airline — highlighted by the relocation of its CEO to Jakarta. It is not a coincidence that the bidding for F&N's assets is being led by a Thai company — that too shows that Asean companies are taking Asean integration more seriously.
In short, Asean's progress will continue to be marked by the occasional setback — the substantial differences among its members make this inevitable. But Asean can deal with this, especially with Indonesian leadership. And more importantly, Asean's economic moment has come and the surge in business opportunities integration brings will help boost support for even more integration.
Manu Bhaskaran is a partner and head of economic research at Centennial Group Inc, an economics consultancy. This story appeared in