In the summer of 1967, the foreign ministers of Indonesia, Malaysia, the Philippines, Singapore, and Thailand held a series of informal meetings in the beach resort of Bang Saen, near Bangkok.
Southeast Asia was in the midst of a great transformation, still dealing with the political and territorial consequences the retreat of colonial powers following World War Two. Indonesia and Malaysia had ended a series of border skirmishes only a year earlier. The Vietnam War was at its height.
Against this backdrop, there was an apparent sense of urgency. Thanat Khoman, Thailand’s foreign minister at the time, suggested a regional grouping, just the latest attempt by the Southeast Asian countries to join forces. But this time, it worked. On August 8, 1967, the five countries agreed to create the Association of Southeast Asian Nations, now widely known as the Asean.
The five foreign ministers who signed the agreement each delivered a speech, singing the praises of an idea whose time appeared to have come. Sinnathamby Rajaratnam, Singapore’s foreign minister, perhaps said it best.
“We must now think at two levels,” he said. “We must think not only of our national interests but posit them against regional interests; that is a new way of thinking about our problems.”
From those humble beginnings, Asean has grown dramatically. The regional bloc has grown to 10 countries and has issued joint proposals on banking, capital markets, free trade, food safety, and a multitude of other areas.
For all this, there is a fear that progress has stalled.
What’s the difference?
The differences between Southeast Asian countries are stark. Indonesia, Vietnam, and the Philippines are poor but growing fast, boasting large populations that give them real potential. Brunei and Singapore are the exact opposite.
There are Muslim countries, Buddhist countries and, in the case of the Philippines, a largely Christian country. There are also different languages, different legal systems, and vastly different political arrangements. Most of the countries in the region are democracies, but Brunei is a sultanate, Vietnam is a one-party state, and one man, Hun Sen, has dominated Cambodia for decades.
Carlos 'Sonny' Dominguez, the Philippines’ finance minister, thinks that a lot of the differences between these countries — including differences in their economies — can be traced to their colonial histories. In Southeast Asia, only Thailand has never been under the yoke of a colonial master.
“We are now throwing off those artificial barriers that were imposed by the colonisers here,” he told FinanceAsia. “It’s really amazing that we’re moving as far as we are given the differences we’ve had.”
But quite how far the Asean has moved is open to debate. The Asean Economic Community (AEC) — one of three pillars of the organisation, alongside security and socio-cultural links — was put in place by the end of 2015. Tariffs on goods have been slashed or eliminated in much of the region. Infrastructure projects have been mooted to make travel between Asean countries easier.
These are all positive steps but they do not appear to have made much difference to trade. Intra-Asean exports made up around 25.8% of all exports from the region in 2015, according to the organisation’s most recent data. That is not a marked improvement on the 22.76% share of intra-regional exports recorded in 2000.
The change in the share of imports is even less impressive — it was 21% in 2000 and 21.8% in 2015.
So while the region’s economies have together certainly grown since 2000, they do not appear to have grown closer together.
There is a good chance that these intra-regional trade figures will improve in the years to come. After ostensibly hitting its 2015 targets, the AEC is into its next phase, which should pull down some of the barriers to trade in services. But it is clear that the Asean has not been on an inexorable path towards greater economic integration.
The Asean’s aborted free trade agreement with the European Union is a good example of the lack of unity among Asean nations. After failing to strike a region-wide free trade agreement in 2007-09, the EU instead settled on signing free trade agreements with individual countries. It has now signed a free trade agreement with Singapore, finalised negotiations with Vietnam, and is in discussions with Indonesia, Malaysia, the Philippines, and Thailand.
“The AEC is still in its very early stages,” Linda Yueh, adjunct professor of economics at London Business School, said on the sidelines of Maybank’s Invest Asean Event in Kuala Lumpur. “The Asean has not yet got enough of an integrated approach, and its still going to be some years before the region has the institutional framework to be able to speak with one voice.”
The inability to speak as one has taken on greater urgency over the last decade, as China has risen from an emerging economy to a global superpower. Although the bloc has signed a free trade agreement with China, the Asean has been unable to take a common line on the South China Sea, despite the Chinese encroachment that threatens their interests to varying degrees.
China’s Belt and Road Initiative, potentially a boon for the region, is being negotiated on a country-by-country basis.
Lim Hong Hin, deputy secretary general of the Asean for the AEC, points out that intra-regional trade is the largest trade source for the bloc as a whole. He pointed to the work done putting common frameworks in place, in particular those of the AEC.
“Asean as an organisation has also contributed to ... economic progress by way of providing market certainty through agreed rules and cooperation frameworks, and by providing a collective vision and directions for the region’s economy in going forward,” he told FinanceAsia.
The bloc can certainly not be accused of a lack of ambition when it comes to pushing greater Asean integration. But a look at the progress so far in the financial and capital markets shows what has held it back — and just how much work is still to be done.
Don’t bank on it
The bloc has pulled off several serious-sounding deals covering banks and capital markets. But the problems facing these agreements highlight one of the main issues holding back Asean integration.
Banking regulations are notoriously complex and the task of bringing them together in countries that speak different languages and have vastly different legal systems is even more so.
But one Asean initiative at the very least represents a big step forward.
The Asean Banking Integration Framework (ABIF), approved in December 2014, was a ‘critical milestone’, according to a March 2015 statement from the region’s finance ministers and central bankers. The move was part of a broader Asean Financial Integration Framework, which seeks a widespread integration of financial and capital markets in the region.
Underpinning the ABIF is the notion of qualified Asean banks, or QABs. In theory, these domestic champions could win the right to expand throughout Asean, creating outposts in markets across the region. But a cursory look at the details shows how unambitious the plan really is.
QABs are not being given pan-Asean banking licenses. Instead, the whole notion of a qualified Asean bank relies on bilateral agreements between different national regulators and focuses only on specific institutions.
By 2020, each Asean country should have signed, or be near to signing, at least one bilateral QAB agreement. The timeline is two years tighter for the region’s five-biggest banking markets: Indonesia, Malaysia, the Philippines, Singapore and Thailand.
This is how business is often done in the Asean. Region-wide proposals become suggestions for bilateral links. Regulators tiptoe around competing interests in the region, ensuring that arguments are kept to a minimum but also hindering progress.
Indonesia and Malaysia have already signed an agreement, Malaysia and the Philippines have concluded negotiations, and “several other bilateral negotiations” are currently taking place, said the Asean’s Lim. But the bilateral nature of these deals is part of the reason that bank analysts remain sceptical about how much difference the QAB scheme will make to a region that is dominated by domestic banks each eager to protect their turf.
“The QAB scheme has not been as effective as hoped,” said Ben You Ang, a bank analyst at CreditSights in Singapore. “There is going to be some incremental increase in lending but there are a lot of problems too. There’s no central authority and every country has their own priorities and regulations which will hinder progress.”
The incentives for QABs are also vague at this point, although the Asean could help by offering greater clarity. Boon-Hiong Chan, Deutsche Bank’s head of market advocacy in Asia Pacific, says the organisation is likely to give more details on what specific advantages QAB status offers, although he said it was hard to predict a timeline.
“If I’m an Asean bank applying for QAB status, what does the license give me?” he asked. “Do I have the ability to open more ATMs than if I was a foreign bank applying normally? Can my ATMs latch onto the national ATM structure? We’re still waiting for details at this point.”
Banking integration is not the only area where the best-laid plans in the Asean region have failed to make a lasting difference. The Asean has also put in serious work to try to better integrate capital markets in Southeast Asia — an effort that has yielded few tangible benefits.
In the second part of this feature next week we look at why the Asean Capital Markets Forum has failed to take off, and why Asean has failed to product international corporate titans.
