As we draw to the end of 2015 and the date of completion of the ASEAN Economic Community (AEC), there is a lot of analysis regarding what happens post 2015. Most analysis involve a review of the achievements and progress measured against the AEC Blueprint and then make recommendations on the way forward. Most of the recommendations are made up of completing the unfinished business of AEC 2015 and then go on to outline how to widen and deepen AEC 2015 so ASEAN can be an integrated production base and market. Only a few try to understand the root causes of the slower than desired progress towards this end goal. This book fills the gap by exploring how domestic conflicts at the level of each ASEAN country have impacted on each country's AEC commitments.

Therefore, the editors of this volume and ISEAS–Yusof Ishak Institute should be congratulated on choosing such a topic in a timely way. This publication is a very welcome publication because it attempts to get at the root causes of domestic constraints on the commitments that each ASEAN economy can make. Despite the acceptance of the vision at the very top level and the long-term process of development in ASEAN, it is a fact that the lack of appreciation for the ASEAN process in a country and that the benefits are not directly felt in the country, means that there has been lack of support domestically. Furthermore, despite the fact that the AEC has four pillars including an equitable ASEAN, there is not much in terms of commitments and concrete actions in this pillar. Most of the AEC commitments and actions have been in the first pillar of a single production base and market, which involves liberalization and facilitation.

In 2011 when Indonesia was the Chair of ASEAN, it was recognized that without strengthening of the equitable pillar it would be hard to have the confidence to progress on the first pillar and other pillars related to a competitive ASEAN and the way ASEAN engages externally. Without addressing the inequitable development due to economic integration within and between ASEAN countries, it was difficult to get more support to speed up opening up and integration.

INTRODUCTION

The date 31 December 2015 will mark the formal establishment of the ASEAN Economic Community (AEC), and the commitments behind it. While it is generally understood that the AEC is likely to liberalize the region to create a single market, most often people forget to look at other aspects of the AEC: the creation of a competitive economic region; equitable economic development; and integration with a global economy. The other three pillars of this community depend upon the commitments of member countries to facilitate economic activities and conduct regulatory harmonization instead of simply liberalizing their markets.

The facilitation and harmonization aspects of the AEC Blueprint (“the Blueprint”) are often overlooked and difficult to implement as they require changes or revisions to behind-the-border measures. For example, the implementation of the ASEAN Single Window (ASW) has been delayed due to incomplete related national initiatives. While the AEC Scorecard indicates that progress within Pillar I (measures for Single Market and Production Base) and II (measures for Competitive Economic Region) has reached 75 per cent and 86 per cent respectively in Phase III of implementation (2008–13), many of the reform measures under both these Pillars have yet to result in concrete positive outcomes. Nevertheless, they are critical for enabling member countries to gain from the AEC and to ensure greater coverage of such gains.

There are many factors behind the difficulties in implementing the facilitation and harmonization measures. These range from technical and human resource capacity to political willingness and a reluctance to undertake reforms. Some countries in ASEAN face additional challenges as they have a large population and land area as well as a relatively dispersed decision making system, as in the case of Indonesia and the Philippines. It is harder for these countries to implement behind-the-border commitments and to align domestic policy with international practices due to a decentralized governance system and a fragmented political situation.

This chapter discusses the challenges that Indonesia faces in implementing the AEC's behind-the-border commitments. The current state of implementation is highlighted to provide some background to the situation. This chapter then examines several factors behind the country's readiness (or lack of it), taking into account political economy issues and perceptions towards the AEC and economic integration in general.

INTRODUCTION

Constant pressure to stay competitive built the momentum for ASEAN Leaders to conceptualize the ASEAN Economic Community (AEC) as a vision for deepening and broadening regional economic integration in 2003. The AEC is characterized by four pillars: a single market and production base; a highly competitive economic region; a region of equitable economic development; and a region fully integrated into the global economy (ASEAN Secretariat 2009). While the original timeline for the AEC was 2020, it was subsequently accelerated to the end of 2015 in response to the confluence of regional as well as global challenges that confronted the region (Austria 2015).

As a founding member of ASEAN, the Philippines has embraced the challenge of moving towards attaining the AEC vision because it is consistent with the overarching goal of increasing the country's competitiveness in an era of globalization and regional economic integration. The Philippines has implemented substantial market-oriented reforms covering liberalization, facilitation, privatization and deregulation since the 1980s. These were carried out in various stages involving unilateral, regional as well as multilateral approaches (Austria 2003). Yet despite these policy reforms, the country has been affected by the boom-bust cycle of economic growth, lagging behind its neighbours in the region after more than three decades of reforms. Nevertheless, for the past three years, the country's growth performance was not only higher than its past records, but it was also the highest in the region, after China. However, it remains to be seen if this performance is sustainable.

In fact, the country's expected structural transformation from agriculture to manufacturing did not take place (Aldaba 2014). The contribution of the manufacturing sector to the economy remained at less than a quarter of GDP, in contrast to Thailand's experience where the sector gradually evolved to become the driver of economic growth. The automobile industry was one of the early industries promoted by the Philippines in its bid for industrialization in the 1980s. This was logical as the country participated in the changing landscape of global production networks in East Asia, whereby the labour-intensive segments of technologically complex production processes are separated from the capital- and skill-intensive segments and located in developing countries, linked through international sub-contracting and outsourcing arrangements (Austria 2013; Aldaba 2008; Rosellon and Medalla 2011).

INTRODUCTION

Until 1986, Vietnam remained an autarky under a central planning regime with some of the following key characteristics: (i) state or collective ownership of all production means, including those in agriculture; (ii) government administered supply of physical input and output; (iii) the absence of factor markets; (iv) and highly regulated goods and services markets. Poor incentives and restricted information flows led to heavy distortions in resource allocation (Vo and Nguyen 2006). While ensuring the contribution of output to the state, cooperatives usually failed to meet half their members’ demands. Facing an economic crisis and severe food shortages, Vietnam carried out reforms in the early 1980s, but only at the micro-level.

The year 1986 marked a major breakthrough in economic reforms as the country rejected the rationale of the central planning model, and declared its intention to transform itself into a mixed-market economy. Since then, various market-oriented reforms have been undertaken, aimed at stabilizing and opening up the economy, and expanding freedom of choice for all economic units. Reforms of goods markets and factors of production took place gradually; legal and policy reforms were undertaken to create a level playing field for all economic entities, irrespective of their nationality or form of ownership.

The reforms brought about remarkable socio-economic success in Vietnam. The pace of economic growth increased steadily, averaging 7.8 per cent per annum during 1990–2010, despite moderating to below 6 per cent per annum during 2012–14. Exports expanded at an average annual rate of 18.8 per cent per annum during 1990 to 2014. GDP per capita improved from US$98 in 1990 to above US$1,910 in 2013, thereby helping Vietnam to become a middle-income country in 2008 (Vietnam News Daily, 14 April 2014). The poverty rate dropped sharply from 58.1 per cent in 1993 to just over 12.1 per cent in 2014.

The country's wide-ranging socio-economic success was the outcome of several factors. First, Vietnam had committed itself to bold and comprehensive reforms. After being severely challenged in 1985 by the failures of microeconomic reforms and by food scarcity, it recognized the importance of undertaking more comprehensive and consistent marketoriented reforms. Once they were initiated, these reforms gathered momentum and have now become practically irreversible. Moreover, these domestic reforms were largely inclusive and focused on benefits to people. This ensured sufficient domestic consensus for reforms and related policy adjustments.

INTRODUCTION

Given its small-size and dearth of natural resources, Singapore's development strategy was to create an open economy, with the world and the region as its hinterland. This has enabled Singapore to progress from a third world city-state, at the beginning of its political independence in 1965, into a first world economy. Decades of growth have transformed a regional entrepot into an export-manufacturing platform, a services hub and a knowledge-based economy. The government played a crucial role in this process, initially to jump-start industrialization and increasingly to facilitate economic restructuring. Policy orientation is towards a free-trade and liberal foreign direct investment (FDI) regime, heavy investments in physical infrastructure, human capital to ease supply constraints and achieve competitiveness, a pro-business environment with an efficient and non-corrupt bureaucracy, a stable macroeconomic and industrial relations environment, efficient regulations and a minimal fiscal burden.

Singapore's participation in ASEAN and the ASEAN Economic Community (AEC) is for both strategic and economic reasons. On strategic grounds, ASEAN helps Singapore to achieve its goals of regional peace and stability, and regional cooperation in handling trans-boundary problems of environmental pollution, pandemic outbreaks, security issues and financial contagion. On the economic front, ASEAN economic integration facilitates Singapore's exports and outward investment flows to neighbouring countries and helps anchor Singapore as a key node in regional production networks and as a regional services hub.

For many economies, opening up to globalization and regionalization — with their attendant winners and losers — have engendered strong domestic political economy responses. In the AEC, this is a key reason for the slow and weak implementation of many initiatives. Fortunately for Singapore, the domestic lobbies and pressures hindering implementation of liberalization commitments have been weak. This is in part due to the small size of the city-state and its long exposure to the competitive forces of globalization and regionalization. In part, it may also be attributed to the high trust of Singaporeans in their political and economic leadership, high employment rates and a low incidence of poverty. Hence, as the case studies on the electronics and aviation sectors illustrate, there is very little domestic pressure in Singapore, particularly against the AEC's liberalization process. Instead, pressure comes mostly from Singapore's general approach of adopting non-protectionist measures to manage global competition.

As ASEAN reached its milestone of December 2015, there is immense debate on the state of regional integration. While member countries have made commitments to the regional goals and targets of an ASEAN Economic Community (AEC), they continue to face hurdles in the effective implementation of their commitments in their respective domestic economies. This slows down the entire process of ASEAN Community- Building, thereby limiting the realization of the full potential of the ASEAN Leaders’ vision, envisaged in 1997, of “a stable, prosperous and highly competitive ASEAN economic region in which there is a free flow of goods, services, investment and freer flow of capital, equitable economic development and reduced poverty and socioeconomic disparities”.

Given this scenario, we thought it is important and useful to undertake a study that can illuminate the academics, policymakers and ordinary citizens on implementation issues in member countries. Our reading of the literature and discussions with fellow researchers and domestic stakeholders in different countries led us to conjecture that domestic conflict may be an important source of implementation problems. We found that these domestic conflicts can take several forms in ASEAN countries ranging from macro-level policy-making to firmlevel perception of winners and losers from the establishment of AEC. As ASEAN members are very different from each other, the nature of domestic conflicts also varies depending on the economic structure of the country, its stage of development, degree of openness to the global economy and its development goals and priorities. It is important to understand the nature of conflict and identify the winners and losers so that the member economies can formulate appropriate domestic policies for deeper economic integration in ASEAN beyond 2015.

In order to meet the objective of the study, we gathered Southeast Asian experts to discuss about six selected countries of ASEAN — Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam. We also thought it is important to incorporate some discussions at the regional level to foster an understanding of the overall perspective and how it is determined as this will provide a backdrop to the country studies.

It should be noted that part of this book volume is already published as a journal issue — Journal of Southeast Asian Economies (JSEAE), vol. 32, no. 2. Special Focus on “Moving the AEC Beyond 2015: Managing Domestic Consensus for Community-Building” — in August 2015.

INTRODUCTION

The late Dr Goh Keng Swee, speaking in his capacity as then Minister for Finance of Singapore, made this insightful observation on regional economic cooperation in a speech delivered at the University of Singapore Society's annual dinner on 12 January 1970 (Goh 1995, pp. 104–11):

He then went on to outline the practical underpinnings for the then ASEAN members to trade with each other, citing the very real “value for money” from trade in goods and services among the different economies in the region. However, Dr Goh also acknowledged that the “classical doctrine of international trade” and the notion of free trade are rarely observed in their entirety in the real world, “either in Southeast Asia or elsewhere” (Goh 1995, p. 105). Close to five decades later, this observation still finds relevance in the efforts being made by members of the Association of Southeast Asian Nations (ASEAN) to achieve the ASEAN Economic Community (AEC) that will bring down barriers to free movement of goods, services, capital, and skilled labour across sovereign borders in the region. With 91 per cent of the 506 AEC measures being accomplished,1 member states are now faced with the challenge of addressing behind-the-border barriers, and negotiating a comprehensive regional trade arrangement with several of ASEAN's external partners (Goh 1995, p. 104).

Despite the hype and excitement over what will be ushered in by end-2015 as the first milestone of the AEC, which is part of a politically, economically and socially integrated ASEAN Community, there is a sense of déjà vu. The reality is that the deliberate and planned intergovernmental measures taken by sovereign governments to benefit from international trade, requires the will and capacity of all parties negotiating these agreements to commit to and implement these complex plans and arrangements. Thus, national-level follow-through is important to give effect to regional commitments.

INTRODUCTION

The prospect of an ASEAN Economic Community (AEC) has progressively raised interest on the state of economic integration among members of the Association of Southeast Asian Nations (ASEAN). Although the Chairman's Statement from the 26th ASEAN Summit (April 2015) indicated that the current rate of implementation of the 2007 AEC Blueprint (“the Blueprint”) goals stands at 90.5 per cent (ASEAN Secretariat 2015), there are numerous studies that question the use of a scorecard approach as a monitoring mechanism. These implementation scores do not necessarily capture the actual extent of economic integration in the region. For instance, recent business surveys show that although tariffs have been reduced or eliminated among ASEAN countries, non-tariff barriers are still prevalent (Kawai and Wignaraja 2011; Hu 2013). These include nonautomatic licensing schemes, technical regulations, benchmarked standards, administrative costs, which are attached to the use of preferential measures, and a lack of physical and institutional connectivity (ASEAN Secretariat and World Bank 2013). Similarly, ASEAN citizens can hardly attribute the rise in incomes or better job opportunities to the AEC initiatives (Chia 2011a). These caveats suggest that not all of the AEC targets can be achieved by the end of 2015. This deadline may well mark a milestone rather than the complete achievement of intended goals.

How then do we interpret the disparity between stated intentions, goals and targets of the AEC and its current state of achievements and implementation? The literature frequently attributes the lack of effective progress in ASEAN economic integration to a lack of political will. One possible explanation for the lack of political will is the fact that deep regional economic cooperation faces domestic opposition arising from various economic conflicts. For example, after the Treaty of Rome was signed, it took the European Economic Community nearly forty years to achieve its objective of a single market. The stalling Doha Development Agenda can also be attributed to domestic resistance and hostility from protectionist groups in participating economies that prevent member countries from achieving the required single undertaking rule. Likewise, for ASEAN, even though the AEC is a regional initiative, implementation is left to the individual member economies. Thus, regional cooperation might have to overcome domestic antagonism. In other words, while ASEAN's economic integration is a response by the region's respective governments to globalization, it may not be supported by some domestic interest groups.

INTRODUCTION

Services currently account for more than two-thirds of the world's GDP (63 per cent in 2013) although its share in total trade remains below 20 per cent (WTO 2014a). It should, however, be noted that traditional trade statistics, which measure gross trade flows rather than value-added at various stages of production, may strongly underestimate the contribution of services to international trade as shown by recent research on production through global value chains (GVCs). These GVCs make extensive use of services such as information and communication technology (ICT), logistics, transport, distribution and business services (United Nations 2014). Almost half (46 per cent) of value-added in exports is contributed by service-sector activities. This share is higher in developed countries (50 per cent) than in developing countries (38 per cent). This fact confirms that greater value-added tends to be captured by developed countries, in which many transnational corporations are headquartered, largely through services activities. More importantly, two-thirds of global foreign direct investment (FDI) stock concentrates on services, underscoring the importance of openness to FDI in services, especially for developing countries where the services sector tends to be more protected than manufacturing.

In Malaysia, the service sector has also grown considerably over time. In 1990, it contributed towards 44.5 per cent of the country's GDP and 53.5 per cent of its total employment. By 2014, its contribution to GDP was 55.3 per cent while the share to employment was 59.4 per cent (Ministry of Finance, Malaysia 2014). Its importance for the country in terms of complementing growth in manufacturing was first recognized in the Second Industrial Master Plan (IMP2: 1996–2005) that introduced the idea of developing supporting services under its “Manufacturing ++” strategy, or the cluster-based development strategy. Nevertheless, no specific service sectors were targeted for development. In contrast, the Third Industrial Master Plan (IMP3: 2006–20) not only reiterates the importance of the service sector as an important intermediary for supporting the development of businesses and trade in all sectors, but it further targets eight service sub-sectors for development. These are business and professional services, distributive trade, construction, education and training, healthcare services, tourism services, ICT services and logistics. The contribution of these sub-sectors as new sources of growth for the country includes their potential to provide linkages and spill-overs between sectors.

Being Special

In January 2015 the Tourism Authority of Thailand launched its “Discover Thainess” campaign. In a country where travel and tourism support a significant fraction of the population, and directly contribute 8.6 per cent of GDP, the country's good image is a tremendous asset. This campaign is designed to highlight the “unique” qualities of the kingdom at a time when its international reputation has been buffeted by domestic political upheavals. With two military coups in the past decade, and an economy that has fallen behind the impressive growth rates elsewhere in Southeast Asia, Thailand has looked to trade on its cultural endowments. Images of traditional dancers, colourful hill tribes and distinctive cuisine have led the push for visitors to “Discover Thainess”. This foreignerfocused marketing initiative matches an internal drive that encourages the Thai people to defend their heritage. These are both politically charged efforts. The cultural politics of “Thainess” has surged since General Prayuth Chan-ocha and his junta, known as the National Council for Peace and Order, seized power.

Since their overthrow of the elected government on 22 May 2014, the military rulers have quickly returned to familiar patterns of dictatorship that rely on ideas about the defence of the monarchy, the unity of the nation, and the elimination of subversive threats. The public relations entities that support military rule enjoy access to a reservoir of notions and beliefs about national identity that can help support the unelected government. The primary source of these notions and beliefs is the concept of “Thainess” (kwam pehn thai). In its simplest, official expression, Thailand is the “land of the free” (meuang thai or prathed thai), an assertion that emerges from the country's earlier efforts to remain uncolonized by European powers. The idea that such Thainess is distinctive, and even exceptional, has earned wide currency, especially during the reign of King Bhumibol Adulyadej, who has been on the throne since 1946. His connection to the Thai ideal also influences beliefs about status, hierarchy, obedience, loyalty and conflict. Pride in Thainess is lived out in food, language, etiquette and other cultural practices. Being Thai is to belong, in this interpretation, to a great and honourable civilization.

Though dominated by the 9 November elections (see the separate chapter in this volume by Tin Maung Maung Than) for state/regional and national legislatures, most of the past year was devoted to the usual rounds of human life and governance. Nature played a large role, as always, and though the life of the first Hluttaw (legislature) under the 2008 constitution began in 2011 with great expectations, 2015 ended still with hard times for the government and people of Myanmar. While the economy continued to develop, though at a slightly slower rate than in recent years, and predictions of further growth remain strong, Myanmar is still some way off its goal of ending the poverty in which much of the population seek out a daily meal. Internationally, Myanmar continues to be courted by a number of countries, and despite criticisms and jibes, particularly from the bully pulpits of sanctimonious Western politicians, relations with the world remained remarkably friendly. The ally of none, Myanmar remains the friend of all.

Of course, for most of the population, it was local developments which dominated the year and, in addition to the election campaign, related social tensions, particularly over issues such as illegal immigration and the place of the various religious minorities in the predominantly Buddhist country, remained central to public discussions and, indeed, forced the government to respond with legislation of dubious significance other than as a sop to some enflamed Buddhist militants. Conflicts over land rights and usage also persisted, as did the perennial issue in Myanmar politics — the role of students in the management of the educational system. More importantly for the future of the country, the long-sought solution to the country's nearly seven decades of armed conflict in the name of ethnicity seemed little nearer resolution despite months of negotiations culminating in a truncated “nationwide ceasefire agreement” signed by the government and eight ethnically designated armed groups.

Student Politics Revisited

Historically, students have played, or have attempted to play, a significant role in Myanmar politics. The nationalist narrative is centred around student politics in the 1920s and 1930s. Some of the firebrands in recent politics got their training and inspiration from the left-wing student activists of the 1950s.

Southeast Asian economies are relatively outward oriented. It thus comes as no surprise that the performance of these economies is affected by the health of the global economy. For 2015, the global economy is expected to grow at a rate of 3.1 per cent. This is only slightly lower than the 3.4 per cent achieved in the previous year. Whilst not disastrous, the slower growth, especially in key markets such as China, is likely to dampen the demand for manufactured goods and primary commodities exported by countries in this region. There are other adverse external developments as well. These include the continuing decline in oil and commodity prices, as well as the sharp depreciation of national currencies against the U.S. dollar. Such unfavourable developments negatively affect some countries more than others, depending on the degree of economic openness, the nature of the trade structure and the strength of domestic demand.

This chapter aims to provide a broad survey of the global economy and its effects on the economic performance of Southeast Asian economies in 2015. The nature of the adverse global conditions is discussed in the next section. How such conditions affect the economies in the region is discussed in the third section. Some of the structural challenges affecting growth in the medium- and long-term are discussed in the fourth section. The fifth section concludes.

Adverse Global Economic Conditions

The global economy is dominated by a few large economies, including the United States, China, Japan and developed countries in the European Union such as Germany and the United Kingdom. These countries collectively account for about half of the world's GDP (Table 1). The slowdown of these major economies would adversely impact the growth of the global economy. In 2015 the global economy did grow at a slower pace of 3.1 per cent compared to 3.4 per cent in 2014 (Table 2). A key factor responsible for this slowdown has been the continuing decline in China's growth rate from 7.7 per cent in 2013 and 7.3 per cent in 2014 to 6.8 per cent in 2015. The slower pace of growth is driven by a number of structural factors and is expected to be the “new normal”. These factors include rising debt levels, lower capital formation rates and lower productivity growth. China has also experienced financial volatility in 2015.