ASEAN: Focus on regional interest

22 February, 2014
As appeared in

RESEARCH commissioned by CIMB Asean Research Institute on behalf of the Asean Business Club shows gaps in achieving the Asean Economic Community (AEC) regional promise.

These can be filled by a concentration on the regional interest which takes care of the national interest as well.

Take aviation. The Asean Open Skies policy which is supposed to come into effect in 2015 is frustrated by member states, most significantly Indonesia, opting out of the granting of fifth freedom rights to other Asean carriers. With fifth freedom carriers can discharge and pick up passengers enroute to third Asean countries instead of being limited point to point between countries.

Clearly, with fifth freedom the much vaunted Asean connectivity would be enhanced. Yet it is blocked ostensibly to protect the national airline industry and domestic markets.

However, businesses must, and can, fend for themselves. If they do not, they will be gobbled up in a globalised world economy. Thus Indonesia’s very own Lion Airline, not only competes in its own market but also ventures into other markets. Its joint venture in Malaysia, Malindo, is making inroads – or rather airwaves – in the region and beyond.

What’s sauce for the goose is sauce for the gander. Indonesia has many big and successful companies that can come out and take on the competition.

Otherwise, if domestic companies are supine and protected, their markets will be attacked, as experienced by the protected motor car industry in Malaysia. It is not just the open world economy. New arrangements are coming on-stream such as the Regional Comprehensive Economic Partnership and the Tran-Pacific Partnership which will cut deep into Asean markets.

Still with aviation, Asean actually signed an Air Transport Agreement with China in 2010 whose provisions accord fifth freedom rights to Chinese carriers within the region. It is most strange that there is parsimony with its own regional carriers but not with those from China.

I am not arguing that Chinese carriers should be denied but that Asean carriers SHOULD NOT be denied. Indeed it would make good sense for Asean carriers to get stronger against the competition by forging an Asean airline for instance. The narrow national interest is becoming increasingly untenable.

Not only to fend off challenges but also for forging combined benefit.

McKinsey finds Asean infrastructure investment lagging behind the global average of 3.6% of GDP. While Vietnam and Malaysia are closest to investing to meet infrastructure stock of around 70% of GDP, to achieve advanced-economy level of productivity, most others are way behind.

It is estimated Asean needs infrastructure investment of a staggering US$2.4 trillion between 2013-2030 to reach this 70% level.

A little drop in the ocean that would push this along would be an initiative to allow infrastructure project listing across Asean markets based on a common trading platform. This will encourage regional investment as well as investment from outside the region, attracted by the greater size and liquidity of the Asean infrastructure equity market.

With the takeout source offered by a listing, the infrastructure project(s) will be more attractive for initial debt financing. Infrastructure project listing, obviously without track record, but with projected future cashflows verified by internationally-recognised specialists, was successfully introduced when I was chairman of the Malaysian Securities Commission. A regional incarnation would be of assistance to the Asean infrastructure development agenda.

The benefit of good infrastructure is immense, both in generating further investment and growth, and in providing the people with the means of a good life. In the context of the AEC, it would help narrow the economic disparity between member states, which is one of the four bases on which it is predicated.

If Asean capital markets were better integrated, to begin with for infrastructure projects alone, their greater size and liquidity would attract more substantial investment funds. While there is resistance to that better integration, largely based on the narrow interests of domestic intermediaries, the benefit to the larger regional and national interest of an Asean infrastructure equity market would have positive demonstration effect.

As it is, the size of individual Asean markets exposes them to the crush of reverse investment flows which damage their currencies and real economies. Bigger, more liquid markets, with Asean champion companies listed on them can better withstand the capriciousness of financial markets. If only Asean leaders, in government and the private sector, will see this. Of course, every Asean country must work to strengthen its fundamentals – of which better infrastructure would certainly be a huge piece of the jigsaw.

There is better economic news from some advanced economies like the US, Germany and Britain, pouring in like beautiful winter sunshine. Emerging economies like those in the Asean region – despite the best efforts of recalcitrant financial markets – should gear themselves up to take advantage of a positive sentiment lost in the dark days since the 2008 financial crisis.

Asean, to boot, has its AEC calling to answer: 600 million people market, an economy of well over US$2 trillion which, if it was one, would be the eighth largest in the world with a growth rate near double the global average after registering 9% in the two decades up to 2011, right at the crossroads between India and China. Even for the smallest part of the whole, this must be something worth realising.