AEC: Shining light of the East

21 May, 2016
As appeared in TheStar.com.my

THE level of interest in the Asean Economic Community (AEC) among the business community in the world at large has increased tremendously since its pronouncement at the end of last year.

While not discounting its imperfections, foreigners are more focused on the opportunities and promise of the single market and production base.

With 90% of global economic growth coming from outside the advanced economies, one can understand why. But there are also Asean’s particular strengths which attract attention.

Many are becoming increasingly aware of the size of the Asean economy (US$2.7 trillion, the seventh largest market in the world with over 620 million people). Beyond that, they also realise that its growth potential is very capable of achievement with the demographic dividend Asean will reap from its young population (60% under 35 years of age).

The latter means a high level of productivity from a work force when a lot of the world would see an ageing population not part of the work force increasingly dependent on the resources of the economy.

The young population will also be a huge part of the growing middle class which, on the demand side, will drive the consumption of a multiplicity of goods and services.

The expectation that Asean will become the third largest economy in the world after China and India (or fourth if the European Union is counted as one economy before mid-century is therefore not seen as fanciful.

At the same time, the very disparity in economic development in Asean is also seen as an opportunity to bring up the less developed countries from a low base. Here, large infrastructure development needs are making a number of foreign businesses consider where they might be involved.

Estimates of annual Asean infrastructure development needs vary widely from US$60bil to US$600bil, depending on the definition of what is the base requirement, but the sectors most in need are quite clear: energy, transportation and telecommunications.

The countries farthest behind in infrastructure development are also obvious, with Indonesia requiring around US$500bil for the rest of the Jokowi administration and Myanmar estimated to need US$350bil into 2025.

Companies in countries not so fashionable in Asean economic thinking, such as Russia, are seriously examining the technology they can bring to Asean economic development, in areas such as renewable sources of energy, water treatment and modern construction materials.

One Russian company is looking at, in the first instance, developing business-to-business e-commerce with Asean to facilitate two-way trade.

On the soft side – particularly with Asean’s young population – the greatest infrastructural need is for education and training. The more traditional investors in Asean, such as Britain, are looking at how they can address this beyond the conventional schools and universities.

Training in and introduction of new technologies in Asean are being mulled by many countries, particularly in Britain but also Russia. Creation of Artificial Intelligence in Asean for other markets as well is being looked at by one Russian company.

While not all this new interest in the Asean economic space has arisen from pronouncement of the AEC, that historic event last year has no doubt concentrated business minds on its promise and potential.

The United States, China, Europe and Japan no doubt have a long and abiding interest, but new interest among businesses in countries such as Russia is noteworthy. In August last year, the Russian and Asean economic ministers identified 57 new projects to be pursued.

The Russians now do not want just a roadmap. They want projects to be materialised.

Of course, Russia has geopolitical reasons for wanting to develop trade and investment with Asean. At the Sochi summit this week with Asean leaders, after 20 years the Russian relationship with the region was raised to the level of a strategic partnership.

At the same time the Russians are drawing in the Eurasian Economic Union on their side of the partnership. They are also urging Asean to relate with the Shanghai Cooperation Organisation.

All this reflects the geopolitical factors for Russia’s desire to develop the relationship with Asean – their deteriorated relations with the West and the sanctions against them.

Russia therefore needs to look East. Asean is a bright star. Whatever the geopolitical motive however, Russian businesses would not want to come to Asean if there were no opportunity.

Without taking sides or being drawn into any alliances, Asean should get engaged with diversification of economic relationships for its own benefit. Russia, for instance, has got some very advanced technologies that could compete with the usual suspects to provide good terms and choice.

The Asean promise is not limited to the region. The foreign interests looking at and wanting to come to Asean also see how the market would expand, and how having Asean as their base makes good business sense.

It is to be hoped Asean companies see this too, and might want to engage with them for their own further expansion.

Beyond Asean there is the Regional Comprehensive Economic Partnership (RCEP). Comprising Asean and six other countries – China, India, Japan, Korea, Australia and New Zealand – the expanded free trade area would comprise three billion people and over a quarter of global Gross Domestic Product, and is growing. An Asean base, with its already large market, can be a springboard to an even larger one.

In addition, the Trans-Pacific Partnership (TPP), often seen as in opposition to the RCEP, could very well work to be complementary. With a market size of over 40% of global GDP, the TPP already has four Asean countries committed to join, with three more mulling over it.

Again, an Asean base would be a good platform from which to penetrate that already huge TPP market. An irony would be if, say, a Russian company in partnership with a Malaysian one were to produce goods or services in our country destined for America.

That prospect would be a test of US commitment to free trade. But that is another story.

The story now is about Asean and its AEC, which is engaging a lot of foreign business interest, whether driven by geopolitical or purely commercial considerations. The promise foreigners see in it is something we in Asean must also see.

It is good to want to ensure an optimal AEC, but we must make business decisions now, as others are making.