The ‘ASEAN way’: what it is, how it must change for the future

Gutteres 2018

UNIC/Maria Teresa Debuque Secretary-General António Guterres welcomed by Philippine President Rodrigo Duterte and First Lady Honeylet Avancena to the 31st Association of Southeast Asian Nations (ASEAN) summit dinner on 12 November 2017.

This article is brought to you thanks to the strategic cooperation of The European Sting with the World Economic Forum.

Author: Nazir Razak, Chairman, CIMB Group Holdings

For more than half a century, the Association of Southeast Asian Nations has been a resilient force for peace, stability and diplomatic unity amid tremendous political, economic and social change across the region. Despite the incredible diversity and disparities among its member states, ASEAN has provided a solid foundation for their rapid socio-economic development.

ASEAN started out in 1967 with five countries marked by the ravages of war and post-colonial conflict, with a population of 200 million and a GDP of US$22 billion. Today, the expanded ten-country grouping is home to more than 630 million people with a GDP of US$2.8 trillion. This makes it the sixth-largest economy in the world. With its favourable demographics, well-educated and industrious workforce, rich endowment of natural resources, cultural and geographic linkages to the most important growth engines of the world and advanced infrastructure, ASEAN is well poised to sustain rapid progress.

ASEAN is not only a story of successful regionalism, but also of great potential for even closer cooperation – if the organization adapts to a future that is very different from the past.

The ASEAN Way

ASEAN owes much of its success to the so-called “ASEAN Way”, a form of regional cooperation that puts national sovereignty and self-interest first. This consensus-driven, non-confrontational model of decision-making allows countries to opt out of (or delay participating in) any initiative. It gives minimal empowerment to supranational bodies, such as the ASEAN Secretariat, and avoids legally binding commitments. This makes it politically easy to be a member of ASEAN, but economic integration requires far greater certainty and transparency. Ultimately, the ASEAN Way has inhibited the creation of an integrated economic bloc. The ASEAN Economic Community (AEC) launched in 2016 is far from the envisaged single production base articulated in the 2007 ASEAN Charter.

Our expectations for the future have changed dramatically with the onset of the Fourth Industrial Revolution, which is driven by technologies that blur the distinction between the digital and physical world. It’s time to think about a new strategy for ASEAN and a different vision for the region’s economic integration.

Updating ASEAN

The inconvenient truth is that while ASEAN as a whole has been a great success, ASEAN economic integration has been a disappointment. For example, despite the boom in low-cost flights, the intra-ASEAN share of total tourist arrivals remained largely flat from 41% in 2000 to 42% in 2015. By contrast, intra-EU tourist arrivals account for around 75% of the total. Similarly, the share of intra-ASEAN trade grew only marginally from 22% in 2000 to 24% in 2015, versus 64% for intra-EU trade. Despite tariffs being brought down to negligible levels, non-tariffs have actually soared. Average tariff rates declined from 8.9% in 2000 to 4.5% in 2015, but non-tariff barriers rocketed from 1,634 to 5,975 over the same period.

The real success story has been the growth in intra-ASEAN direct investments, with the proliferation of ASEAN multinational companies and integration of ASEAN operations of such companies. Over the period between 2000 and 2015, intra-ASEAN foreign direct investment soared from 4% to 18%. A cadre of ASEAN multinational companies such as CIMB, AirAsia, Ayala, Petron, Wilmar and Thai Beverage, emerged as they expanded beyond their home markets and embraced the region. Many of these cross-border investments took place despite regulatory and legislative constraints. When the ASEAN Economic Community was first conceived, governments had to encourage companies to think about expanding in the region. Today, businesses are constantly expressing frustration at the slow pace of economic integration. Isn’t it time to give business a bigger role in the process?

New era, new challenges

The Fourth Industrial Revolution and the disruptive pace of digital technologies are dramatically changing the business world. Large companies are challenged by newcomers who can leverage technology without the burden of an outdated infrastructure or rigid mindsets. The Fourth Industrial Revolution doesn’t recognise borders. There is a real danger that ASEAN’s incumbents will be undermined by competitors from outside the region. Who will challenge banks in ASEAN: Ant Financial, Tencent or homegrown fintech firms?

ASEAN’s vibrant start-up scene has produced strong newcomers such as Grab, Tokopedia and Go-Jek, as well as many smaller companies with great potential. Grab has been so successful it has effectively fended off global giant Uber. Given the enterprising nature of young Southeast Asians and their home advantage, how can ASEAN maximise this potential?

The Fourth Industrial Revolution will widen the gap between those with digital skills and those without; those who can adapt and those who are stuck; those who own capital and robots, and those who do not. This revolution is about the threat of widening inequality, and yet it also generates new tools to empower the marginalized and boost inclusivity. How does ASEAN get all this right? Should we collaborate more as a region?

The Fourth Industrial Revolution is first and foremost about data, talent and capital. It’s therefore imperative to ease the flow of these three elements across borders. Currently there are many restrictions on data and capital flows, as well as constraints on work permits. As for rising inequality, how does ASEAN pool resources to ensure the poorest corners of the region have access to the internet? How do we respond to concerns around data privacy and security? And then there’s the question of tax revenues: who receives the income tax from a doctor in Singapore treating a Cambodian patient online?

Economies of scale derived from a common market are crucial in the Fourth Industrial Revolution. We must make this market a reality. However, when I recently spoke to some start-up entrepreneurs, I heard about the sometimes depressing reality of doing business in this region. Here are some examples:

1) An online retailer in Malaysia can deliver faster to the UK than to neighbouring Indonesia. A door-to-door delivery to the UK takes two days, but to Indonesia, it takes three to five days at best and months at worst. It also typically costs three times more to deliver to Indonesia than to Singapore due to administrative and logistical hurdles.

2) There are no standard regulations across ASEAN. Regulations can change overnight with no advance notice, often leaving the goods stuck at custom. Similarly, foreign ownership rules tend to change without early notification.

It seems clear that we need ASEAN to develop a strategy that fully supports talent, ideas and markets across the region.

A closer union

The geographic proximity between ASEAN nations will be meaningless without effective policies to enable cross-border trade and cooperation. A cohesive regional response can only be achieved with strong leadership. This means that ASEAN must empower the ASEAN Secretariat to take the lead. The Secretariat itself needs to become the ‘operating system’ for regional integration. Policies should be crafted by multi-stakeholder groups including entrepreneurs. After all, it is business that has proven to be the most successful part of economic integration so far.

Individual nations are already responding to the Fourth Industrial Revolution. Malaysia has its Digital Free Trade Zone, Singapore has “Smart Nation”, and there are “Thailand 4.0” and “Making Indonesia 4.0”, to name just a few initiatives. However, responding at a national level is not enough. We need an ASEAN 4.0 plan and we need to embark on it now.

Conclusion

The Fourth Industrial Revolution should be viewed as an opportunity rather than threat. We can tackle the future most successfully when we are united as a region. We should discard old paradigms and focus on the essentials for the new era. Let’s spend ASEAN’s political capital wisely and ensure we thrive together. The next step? Place the proposal for developing an ASEAN 4.0 plan at the forefront of the next ASEAN Summit.

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