ASEAN Economic Community — the next 50 years

ASEAN Economic Community — the next 50 years

11/09/17

By Nazir Razak, Chairman of CIMB Group

The Asean Economic Community (AEC) is a compelling idea of regional economic integration that was attractively articulated in the Asean Charter of 2007. I was one of the business leaders at the summit and was so inspired by the message that I moved to align CIMB’s corporate vision with the AEC’s and personally became one of its biggest cheerleaders.

At end-2015, Asean declared itself an economic community but we are far from being the Charter-promised land, to the frustration of many true believers like me. We should be consoled by the new AEC Blueprint 2025, which aims to fulfil many of the original AEC ambitions but it is hard to be optimistic when Asean has not shown any inclination to change how it implements the AEC.

Asean is, without doubt, a success story, especially when one takes a long-term view of improving political and economic relations within the region. Asean remains solidly intact; no one even talks about exiting the bloc unlike at the EU, for long a model regional community. Naturally, what got us here — the so-called Asean Way of doing things — is given much credit for the group’s achievements. However, as the Fourth Industrial Revolution gathers pace, I would argue that we need to accelerate the integration to deliver Asean economies of scale for our companies to competitively innovate and transform themselves in this era of tumultuous change. For that, the Asean Way and the pace at which we have been integrating will no longer do. For the next 50 years, we need a new Asean Way.

Asean Economic Community

Asean began, first and foremost, as a political project in 1967 against the backdrop of fledgling post-colonial states, intra-regional tensions and the Cold War. Our leaders wanted strength in numbers to deal with the rest of the world and a regional forum to discuss multilateral and bilateral issues. At the same time, non-interference in each other’s domestic affairs became an enshrined principle, paving the path for the Asean Way of getting things done.

The Asean economic project essentially began in 1992 with the conceptualisation of the Asean Free Trade Area and the beginning of many rounds of tariff reductions. In 2007, it gained momentum with the conceptualisation of the AEC in the Asean Charter and the beginning of many initiatives to reduce barriers to business across borders towards the dream for the region to become “a single market and production base, characterised by the free flow of goods, services and investments, as well as the freer flow of capital and skills by 2015”.

Despite shifting its emphasis from politics to economic integration, Asean did not change the way things were done. The Asean Way includes upholding the principles of unanimous decision-making, minimum empowerment of the supranational bodies and avoidance of any legal basis or enforcement of regional initiatives. On most integration initiatives, Asean allows countries to opt out or delay participation. So with the Asean Way, being a part of the AEC itself does not require any onerous commitment.

On Jan 1 last year, Asean declared the AEC amid much fanfare. And there were things to celebrate: tariffs had come down as much as practicable and a whole host of Asean initiatives were in progress. The AEC has inspired the proliferation of multinational Asean corporations, like CIMB, to participate in and benefit from its mandate.

However, it has fallen considerably short of the Charter’s promises. Non-tariff barriers and measures remain very high; in fact, they have been increasing. A 2016 study by the Economic Research Institute for Asean and East Asia found that as the average tariff rates of Asean countries declined from 8.9% in 2000 to 4.5% in 2015, the number of non-tariff measures increased from 1,634 to 5,975. Many initiatives, such as the Asean Trading Link and Asean Collective Investment Scheme, also lacked traction, having seen the participation of only three of the 10 Asean members. It is ironic that the 2011 Asean Financial Integration Framework calls for bilateral agreements between the central banks instead of multilateral agreements.

CIMB and the AEC

Motivated by the AEC vision, CIMB has championed its “ASEAN For You” tagline since 2011. We wanted to be strongly associated with Asean; we hoped that customers across the region would empathise with an Asean brand. CIMB would be well positioned to facilitate more trade, investments and travel that would emerge from the AEC. We expected rules and regulations for cross-border banking to ease and hoped that the AEC would bring down more barriers to business.

It has all proved to be so much harder. We knew that operating in multiple markets would be very challenging as it meant managing and navigating different cultures, languages, economic structures and political systems. However, what surprised us was how slowly barriers came down, so the flow of trade, capital and people did not move as fast as we had expected and, more importantly, how resistant banking regulators and government departments were to regional integration. In the final analysis, we did not realise as much cross-border cost and revenue synergies as we had expected and we invested prematurely in systems and processes to enable a seamless Asean-wide organisation, given that national regulatory barriers persist.

Regionalising CIMB was the right strategy but it could have delivered so much more had the AEC made good on its promises. The strategy has given us access to a much larger market and cross-border networks, and looking ahead, the scale to potentially withstand the onslaught of technology, new regulations and New Age customers. The question on our minds now is whether the AEC will enable us to fully realise those scale advantages.

AEC Blueprint 2025

Our regionalisation experience at CIMB has prepared us to view future plans for the AEC through a more pragmatic lens. The AEC Blueprint 2025 describes the new AEC end-state as “highly integrated and cohesive; competitive, innovative and dynamic; with enhanced connectivity and sectoral cooperation, and a more resilient, inclusive and people-oriented, people-centred community, integrated with the global economy”. These goals are indeed more realistic. However, without an execution plan as yet, it is hard to be optimistic when there has not been any indication of a change in the AEC’s approach to implementation.

There is an inherent contradiction between Asean’s deference to national priorities at every turn and regional integration, which requires that decisions be made in the wider interest of the collective of nations. The Asean Way of unanimous decisions and opt-out clauses on any initiative means that integration projects progress very slowly. At the same time, national interest is often confused with domestic corporate interest. For instance, banking integration initiatives that enable regional banks to operate more efficiently across countries will likely be opposed by domestic banks as going “against national interest”.

The implementation of the AEC was also hampered by a lack of leadership. The typical format was for projects to be driven by unwieldy committees of representatives of all nations and very little involvement of the Asean Secretariat. The private sector always complains that it still has to deal with 10 government departments rather than one point of contact. Surely, if Asean is serious about implementation, the Asean Secretariat needs to be empowered and better funded to drive it?

Emerging world order

The year that Asean became a community saw seismic events on the global stage — the election of Donald Trump as US president, the Brexit vote and the rise of neo-populist movements across the world. Earlier, in 2011, Asean had introduced the Regional Comprehensive Economic Partnership (RCEP) platform to consolidate the five Asean free trade agreements with its dialogue partners of China, Japan, South Korea, Australia, New Zealand and India. Negotiations began in 2012 and are still ongoing. The 16 countries make up about half of the world’s population and around 30% of the world’s GDP. The continued process of Asean and wider Asean economic integration under the RCEP is a continued vote for openness.

In recent years, China has also stepped forward to defend globalisation and launch new platforms, such as the Belt and Road Initiative and the Asian Infrastructure Investment Bank, in support of trade and greater cross-border economic integration. These are geopolitical manifestations of socioeconomic trends, not least the rising inequality in the West, and fears and insecurities about the Fourth Industrial Revolution. A new order is emerging; we just do not know what it will look like exactly.

The new world order for business, though, is less difficult to envisage. It will be dictated by technology. Governments can only accelerate and ease adoption of technology; customers will decide on the winners and the losers. Technology will be disruptive to practically all businesses. E-commerce companies are growing exponentially while incumbents are scrambling to adapt to survive. Banks that do not embrace technology will be marginalised by incumbents that adapt and new digital banks. Property developers have to build technologically advanced homes and change how their properties are sold. Even the traditional restaurant and retail businesses are challenged by more efficient home deliveries and e-commerce.

The fastest-growing e-commerce companies today are found in China for two major reasons — their huge domestic market and facilitative rules and regulations. Asean has a similar chance to bring regional scale to bear upon its companies to exploit technology by easing region-wide ecosystems for digital commerce covering logistics, payments, regulations, outsourcing rules, talent mobility and so on.

As I look at CIMB’s future, how we navigate the technology challenge with the right investments and strategies will determine whether it remains a force in Asean banking in the next 10 years. While I believe we have a good chance because we have the economies of scale of Asean, will we be able to withstand global and Chinese competitors with their economies of scale? How Asean enables us to truly realise our economies of scale will prove crucial.

A new Asean way

Asean has significant competitive advantage for the Fourth Industrial Revolution in that we have the talent pool, best demographic market and relatively little legacy infrastructure. The challenge is to bring those advantages to bear upon our businesses as they innovate and transform for the new era.

Technology empowers start-ups but it also enables global domination as we have seen in the case of Google, Amazon and the like. We do not know whether our region’s companies can ultimately win against global giants but at least they have a better chance with a truly Asean marketplace. Grab is an example of an Asean company that continues to stand against the all-conquering global giant Uber in the on-demand ride-sharing market as a highly localised, regional first mover. Asean’s banks have the advantage of their established local brands for now but unless they can leverage region-wide digital banking markets, can they withstand the onslaught of the best global digital player?

In order to accelerate economic integration, Asean needs to recalibrate its implementation approach. We should start by articulating the case for accelerated integration in the light of the Fourth Industrial Revolution to obtain the support of Asean’s political leaders and the public at large. We then need to empower and fund the Asean Secretariat to lead the various streams and dive into the details of non-tariff barriers to be lifted in consultation with businesses, and implementation will need to be supported by enforcement. To ensure success, we also should study the potential side-effects of accelerated integration to help affected businesses anticipate and prepare.

The tension between regional integration and national interest will remain a difficult issue, and it is unrealistic to believe that the regional agenda must always come first, especially given the wide gaps in the stages of development among Asean countries. It is more realistic for each situation to be examined in detail based on impartial perspectives to differentiate between national and vested interests, and also designate fair and fixed timelines for delayed implementation in certain countries. Again, that impartiality needs to come from an empowered Asean Secretariat.

I often describe myself as “enthusiastic but pessimistic” about Asean. I believe in regionalism because I see how CIMB creates value every day by banking across borders for over 12 million customers. I fear that if we do not face up to the realities of the Fourth Industrial Revolution and integrate at our traditional pace, Asean will be forsaking the opportunity to build its own great companies and carve a greater share and control of the new economy for itself. It is because it has become absolutely imperative that we embrace a new Asean Way to accelerate economic integration that I am sadly not optimistic about Asean. But I am desperate to be proved wrong.


Datuk Seri Nazir Razak is chairman of CIMB Group, chairman of the World Economic Forum’s Asean Regional Strategy Group and Asean Regional Business Council and on Asia House International Advisory Council. This is part of a collection of essays featured in ASEAN FutureForward: Anticipating The Next 50 Years, published and launched by the Institute of Strategic and International Studies Malaysia on Aug 28, 2017.