Per 1 January 2016 the ASEAN Economic Community (AEC) came into effect. This community implies stronger cooperation and integration among the ten member countries in Southeast Asia. According to its blue print the AEC involves the launch of a single market and production base among its member nations, hence allowing the free flow of goods, services, investment, and skilled labor as well as the freer flow of capital. Indonesia is one of the member countries.

With the giant economic powers of China and India, global economic gravity has been shifting toward Asia. The economic importance of Southeast Asia should also not be underestimated. A recent Asian Development Bank report states that – if the Association of Southeast Asian Nations (ASEAN) were one economy – then it would be the seventh-largest economy in the world (having a huge market of USD $2.6 trillion) and could become the fourth-largest economy provided the pre-2014 growth levels return.

Contrary to the European Union, the ASEAN member states are more cautious regarding their approach to regional economic integration. Therefore, there will not be a single currency (such as the euro in the European Union).

ASEAN consists of Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Cambodia, Laos, Myanmar (Burma), and Vietnam.

Four Pillars of the ASEAN Economic Community (AEC):

Four Pillars
(i) a single market and production base
(ii) a competitive economic region
(iii) equitable economic development
(iv) integration with the global economy

Source: Global Competitiveness Report 2014-2015

Within Southeast Asia, Indonesia is the largest economy, has the largest population size and the largest land area. With more than 250 million inhabitants, Indonesia accounts for nearly 42 percent of the total population within the ASEAN market. This implies that Indonesia has – and is – a huge market. However, with the country’s logistics costs high (mainly due to the lack of adequate quality and quantity of infrastructure) and the quality of human resources relatively low, there is concern that Indonesia merely becomes a consumer (importing and consuming products and services from other ASEAN nations) while existing production bases in Indonesia may be overtaken.

The AEC also implies that member countries have to reduce protectionist measures (such as non-tariff barriers) and open up politically and economically-sensitive sectors such as natural resources. Recently, Indonesian President Joko Widodo said the Indonesian government has to reduce protectionism as well as cut generous subsidies because it makes the country’s businesses less competitive. Instead, the government unveiled a series of economic stimulus packages that include deregulation to strengthen domestic businesses.

In terms of competitiveness, Indonesia ranks 34th in the World Economic Forum’s Global Competitiveness Index 2014-2015. The country is ranked below Singapore (2nd), Taiwan (14th), Malaysia (20th) and Thailand (31st), but above the Philippines (52nd), Vietnam (68th) and Cambodia (95th).

Global Competitiveness Index 2014-2015:

Country    Ranking
Switzerland          1
Singapore          2
United States          3
Finland          4
Germany          5
Taiwan         14
Malaysia         20
Thailand         31
Indonesia         34
Philippines         52
Vietnam         68
Cambodia         95

Source: Global Competitiveness Report 2014-2015

In terms of trade, the AEC will probably not have a big impact because most tariffs among ASEAN members had already been scrapped to zero percent under the Common Effective Preferential Tariff system (that was implemented – gradually – in 2003). However, under that system all nations still had the freedom to set product specific rules and non-tariff barriers.

The main problem of Indonesia is that the country does not have a well-developed manufacturing industry. In terms of productivity and growth, Indonesia’s manufacturing industry is being outperformed by its regional peers. This situation is due to inadequacies in areas such as technology, infrastructure, gas/electricity supplies and slow reform within the industry (hence limiting foreign direct investment). – 16 January 2016

This column is the first installment in a series devoted to the topic of Indonesia & the ASEAN Economic Community

(2) Next: Indonesia & ASEAN Economic Community: Free Flow of Skilled Labor

Source: http://www.indonesia-investments.com/news/todays-headlines/indonesia-asean-economic-community-aec-introduction/item6386