Is ASEAN ready to become a single market?

To its supporters, the 10-member Association of Southeast Asia Nations (ASEAN) is one of the most durable and successful regional associations in the developing world. Since its founding in 1967, as the story goes, the group has evolved into an effective institution, promoting and fostering economic growth and social cohesion among its members as well as projecting an Asian way of conducting international relations based on consensus and cooperation.

To its critics, though, ASEAN is a weak and ineffective organization, hobbled by a toothless Secretariat and enfeebled by conflicting interests among its members, as was evidenced by its handling of the 1997 Asian financial crisis and the continuing territorial dispute in the South China Sea. The so-called ASEAN way, critics charge, is shorthand for handwringing and indecisiveness.

This contested reputation — weak/strong, ineffective/effective — will be put to the test at the end of the year when the 48-year-old organization is slated to launch its much-publicized ASEAN Economic Community (AEC). The AEC has been billed as ASEAN’s “EU moment,” when member countries move toward economic integration, creating a common market with a combined gross domestic product (GDP) of $2.4 trillion. The business community, unsurprisingly, is eagerly anticipating an intra-ASEAN market with reduced tariffs and freer flow of goods, services and investment across borders. Thus the realization of the AEC would be a crowning achievement for ASEAN and a coming of age that could potentially silence its detractors once and all.

Four months out from the December 31 deadline, how close is ASEAN to achieving its single-market goal? At the recent Southeast Asia Summit 2015 in Kuala Lumpur, Malaysia, that question was at the top of the agenda. Stephen Groff, vice-president for East Asia, Southeast Asia, and the Pacific at the Asian Development Bank, a position he has held since October 2011, has been an advocate of the AEC, arguing that further regional integration would boost economic growth and improve the living standards of ASEAN’s 600-plus million citizens. Knowledge@Wharton spoke with Groff during a break in the summit.

Knowledge@Wharton: There was some skepticism from the summit panel whether the AEC would happen — how did you read it?

Stephen Groff: It depends on whether you look at 2015 as a finish line for the AEC or you look at it as a milestone. If you look at it as a finish line, then, yes, people are going to be skeptical or disappointed, because it’s not going to reach the targets that had been set out for the full implementation of the AEC by December this year. It’s simply not going to happen.

If you look at it as a milestone, if you look at it as a time to step back and assess progress … there’s been a lot of progress, particularly if you look at it in the larger scope of history. If you look at how far the region has come in 50 years, it’s quite remarkable. If you look at 50 years ago — when this was a set of countries that not only didn’t have diplomatic relations, but some were practically at war with one another — to today, where you have visa-free travel across the region, you have virtually tariff-free exchange of goods across the region, you have good diplomatic relations across the region. So by and large, there has been good progress. But more needs to be done; it is not a finished story.

Knowledge@Wharton: What’s holding ASEAN back?

Groff: Looking at what has happened during the last eight years — global financial and economic crisis, continued uncertainty in the eurozone — all those things give politicians and technocrats across the region good reason to pause and to reflect on what they are trying to achieve with the AEC and ASEAN more broadly.

You cannot make direct comparisons between the European project and ASEAN, because we are not talking about any kind of fiscal union or a pseudo political union here. But still, we have to make sure we draw lessons from what happened in Europe, make sure we are incorporating those plans for moving ASEAN forward. It is a good reason to take things with measured steps.

Knowledge@Wharton: Once upon a time, people wrote essays advocating the EU as a model for ASEAN. Is that still the case today?

Groff: The short answer is no. [The EU] is not a good model for ASEAN. In part [that’s] because … there is a lot more cultural continuity across Europe than there is across ASEAN. Two, geographically, Europe is a single land mass, so trade is going to function quite differently within an area of a single land mass, as against an area where the vast majority of geography is ocean…. So it’s not an appropriate model and nor should it be an objective of the ASEAN countries to achieve the same level of integration that you see in Europe.

Knowledge@Wharton: The director general of Cambodia’s National Bank, Chea Serey, questioned whether Cambodia — one of the smallest economies in ASEAN — would benefit as much as a larger economy like, say, Singapore. She is referring to the size and scope of 10 different countries and economies. How do you make sure that all the ASEAN nations benefit equally when you ease tariffs, enable the free flow of goods and services, and labor, too. How do you make sure that everyone benefits equally?

Groff: First, the objective should not be that everyone benefits equally, because that is an impossible goal to achieve. You would want to make sure that those that are harmed or disadvantaged by this kind of integration are taken care of, that there are policies and programs in place that will support those sectors or those communities that are negatively impacted.

Our research suggests that over time all of the ASEAN countries will benefit from this change. In fact, Cambodia, Myanmar, Vietnam — as a proportion of their GDP — will benefit more from integration than the larger economies. But, at the same time, if you break it down by sectors, the negative impacts are across sectors within economies, especially less productive sectors, agriculture being a prime example. Agriculture in many of these countries will be negatively impacted by freer flow of goods and services, because those countries that have more efficient and effective farming systems in place … are going to be advantaged against those countries that have lower productivity. So we need to make sure that we put in place programs that will both encourage increasing productivity in agriculture and also provide skill training to individuals who are going to lose their work opportunities and give them the skills to move into other sectors of the economy … This is not something that happens over the course of a week or two, or a month or even a year; this is a long-term program.

Knowledge@Wharton: And therein lies the problem, as politicians and governments are there for a short time …

Groff: Again, that is why we argue that you need a strong ASEAN Secretariat that can be a constant force in this regard, that can understand what these issues are, can advocate on behalf of different sectors and areas of countries to make sure that politicians are paying attention to these challenges.

Knowledge@Wharton: What are the current problems with the ASEAN Secretariat?

Groff: Well, it is very under-resourced. ASEAN operates on the principle that every member country pays the same dues to keep the Secretariat functioning. You have a challenge when you have very poor countries up against richer countries. Very poor countries can’t afford to pay very much and richer countries can afford to pay more, but if you say everybody has to pay equally, then that will put downward pressure on what those dues are. So, first, you need to be thinking about a system where the collection of funds to support the Secretariat is not based on an equal share notion, but is based more on fees proportional to GDP. So that’s one challenge you have in the Secretariat — it simply doesn’t have the funds to function as effectively as it might otherwise.

Second, you need to think about not only getting more resources to the Secretariat, but also providing salaries and benefits to staff the Secretariat so they can attract the best, most qualified people. And [though] there are some excellent, good, hard-working people within the ASEAN secretariat — I don’t meant to suggest that they aren’t — but if you could provide better benefits and better salaries, you could get even better people there and people that are willing to stay within the Secretariat for longer periods of time.

Another issue is right now the Secretary General rotates among the ASEAN countries in alphabetical order. Some thought should be given to changing that. You have to make sure that you cannot have one country that owns the Secretary General position forever, but there is some value in thinking about a competition … to ensure that you get the best and the most qualified Secretary General.

Knowledge@Wharton: Is there a model that you can draw on?

Groff: Sure, I think that as far as appointment goes … if you look at the OECD, where I worked for a number of years. The Secretary General of the OECD — not one country has a lock on that position, and there is an element of competition in the selection of the Secretary General.

Knowledge@Wharton: Someone on the panel pointed out that there is a lack of grassroots support for ASEAN, and that it’s a diplomat-driven initiative. Is that a fair criticism?

Groff: First, there is not a lot of awareness of ASEAN across Southeast Asian countries. And that is part of the problem of this issue we have discussed — of an under-resourced Secretariat that should be responsible for raising the profile of ASEAN, but the Secretariat doesn’t have the resources to do that kind of work. And so, again, part of the recognition problem, communication problem can be resolved by further strengthening the Secretariat and allowing [it] to play that function.

The other part of it is within the individual countries, moving beyond this simply being a diplomatic exercise to one where the countries themselves play a stronger role in communicating to their populations the benefits of this kind of integration. Consider the advent of National Single Windows as an example. One of attractions of the AEC is the ASEAN Single Window, and each country has to develop its own “single window.” The idea here is to make setting up businesses — getting import permissions, all those other things that are associated with businesses — easier and streamlined, so you can go to one place where you can satisfy all the different regulations.

These “single windows” have been established in many ASEAN countries — the Philippines, Singapore, Malaysia, Thailand and Indonesia — but how many of them are well-advertised? Are businesses aware of this? How much internal communication has gone on within the countries to make it known that the “windows” are available? You need to do a little bit more of that kind of promotion within the individual countries, as a stepping stone to the ultimate ASEAN Single Window, where you can go to one place and you can get import licenses, business licenses in one place that allow you to operate within and across all the ASEAN countries.

Knowledge@Wharton: We are talking about how the public relates to ASEAN but the focus is very much on trade, streamlining businesses. Does ASEAN lack a political narrative?

Groff: The political narrative is always going to be a challenging one, [as] the rationality end has to be driven by economics. …The baseline scenario of ASEAN without AEC suggests economic growth of around 5% a year for these countries for the next five to 10 years. With AEC implemented, you can increase that to 7%, so that’s a fairly significant increase in economic growth. The ILO [International Labor Organization] estimates that 14 million additional jobs will be created by 2025.

So there are a lot of very positive economic benefits that can be realized through this project and I think that has to be the marketing of ASEAN, not the political element of it, because of the diversity of the countries, politically and culturally and even economically. It’s hard to make a compelling narrative in the same way that you can do with Europe. So, really, here it has to be an economic one. And a single economic community of 600 million people, as you point out, also puts it on a same footing with the big regional neighbors of China and India.…

Knowledge@Wharton: If the focus is purely on economics, how do you argue the ASEAN position when it comes to non-economic issues like human rights abuse, climate change?

Groff: I would not say those are mutually exclusive. What I’m saying is that the core of the narrative — the one that will propel the accomplishment of the AEC — is going to be an economic argument at the end of the day. But that doesn’t mean that issues like climate change, human rights should be secondary. In fact, one of the major challenges across Asia as a whole is inequality, both inequality in income and inequality of access, to education, to health, to other services.

Economic growth is going to play a role in generating equality across the region; you are not going to get equality without economic growth. But you need to be paying attention to social protection programs and to environmental issues when you think about growth, in order to make sure you do not widen inequality as a result of growth. There’s a strong political argument for equality and inclusion, because when you don’t have those, the social fabric of the country can be torn apart. So, again, these things are all interrelated; it’s not just an economic argument.

If you try to tell a simple story to get small- and medium-sized enterprises on board, it will not be one about human rights or about climate change, it is going to be about growth and opportunity. But as politicians and as technocrats, we have think about how we are managing that process in such a way that we are not exacerbating the issues about climate change, that we are not exacerbating the issues about inequality and inclusion.