Plugging into Production Networks: Industrialization Strategy in Less Developed Southeast Asian Countries

4. ASEAN Economic Integration and Implication for CLMV Countries

72 4 ASEAN฀Economic฀Integration฀and฀ Implication฀for฀CLMV฀Countries Denis฀Hew,฀Sanchita฀Basu฀Das฀and฀฀ Rahul฀Sen I.฀ INTRODUCTION It is generally said that economic regionalism has a positive impact on economic development as it strengthens economic linkages through trade and investment and encourages the development of production networks. Sen (2007) in his analysis of ASEAN regionalism observes that ASEAN has the potential to promote economic development and facilitate the newer and economically less developed ASEAN members in building up production networks that would facilitate the economic integration process. In this context, this chapter examines ASEAN economic integration and its implications for the CLMV countries, namely Cambodia, Laos, Myanmar and Vietnam. The chapter begins by giving a background on the ASEAN Economic Community and discusses its origin, rationale 04฀PPNetwk.indd฀฀฀72 9/16/09฀฀฀11:21:09฀AM ASEAN฀ Economic฀ Integration฀ and฀ Implication฀ for฀ CLMV฀ Countries฀ 73 and challenges. It then looks at the development divide within ASEAN. It is observed that while the different levels of economic development can be complimentary in nature and therefore facilitate production network development, infrastructure and social gaps can be hurdles for reducing costs. The chapter also examines in more detail the extent of integration of Cambodia, Laos and Vietnam within ASEAN and the rest of the world. Finally, prior to providing some concluding remarks, the chapter analyses the role of free trade agreements (FTAs) in strengthening production networks in the region, especially in the light of newer members of ASEAN. II.฀THE฀ASEAN฀ECONOMIC฀COMMUNITY฀ ASEAN, established in 1967, is one of the world’s most successful regional organizations. It comprises ten countries, namely, Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam. ASEAN countries combined constitute a population of about 567 million, spanning a total area of 4.5 million square kilometers. In 2006, ASEAN generated a combined gross domestic product of US$1.07 trillion and total trade of US$1.44 trillion, accounting for more than a quarter of Asia’s total exports and imports.1 Since its inception, ASEAN has managed to successfully foster closer political and security cooperation, creating a peaceful and stable region. As a result, ASEAN, especially its five original members (ASEAN-5), i.e. Indonesia, Malaysia, the Philippines, Singapore and Thailand, enjoyed impressive economic growth rates, reduced poverty and improved living standards over the past three decades. However, in recent years, the region has begun to face stiff competition from China, particularly in attracting foreign direct investments (FDIs). Since FDI has been an important driver of economic growth in ASEAN over the past three decades, this has raised serious concerns among ASEAN policymakers about the longer-term economic sustainability of this region. Against this backdrop, ASEAN leaders agreed to embark on a bold project to integrate their economies and create an economic community. At the 2003 ASEAN Summit in Bali, Indonesia, ASEAN leaders agreed to integrate their economies by 2020 and establish an ASEAN Economic Community (AEC). The AEC is one of three components or pillars that make up the ASEAN Community as declared by ASEAN leaders in 04฀PPNetwk.indd฀฀฀73 9/16/09฀฀฀11:21:09฀AM 74฀ Denis฀ Hew,฀ Sanchita฀ Basu฀ Das฀ and฀ Rahul฀ Sen the ASEAN Concord II (better known as the Bali Concord II).2 At the ASEAN Summit held in Cebu, Philippines in January 2007, the deadline to realize the AEC was brought forward by five years to 2015.3 The end-goal of the AEC is the creation of a single market and production base where there is free flow of goods, services, investments, capital and skilled labour. Although the approach towards achieving this end-goal was not elaborated in the Bali Concord II, what seems clear at the start was the need to have a significantly higher degree of regional economic integration and institutional development. Why is there an urgent need for ASEAN to integrate? The loss of economic competitiveness to emerging markets such as China has been the major driving force in ASEAN’s efforts to accelerate economic integration. A study on ASEAN undertaken by McKinsey found that ASEAN has lost its competitive edge in terms of labour costs to China (Schwartz and Villinger 2004). Furthermore, China has now overtaken ASEAN as the world’s prime location for FDI. This may have serious repercussions for ASEAN’s economic well-being over the medium to long-term as FDI...