Policymakers within the Association of Southeast Asian Nations (Asean) have set themselves an ambitious target. In early 2007, leaders agreed to set up a regional economic community by 2015, bringing forward by five years the realisation of their vision of a single, integrated, seamless market and production base.
That resolution was reaffirmed by Cesar Purisima, the Philippines secretary of finance, who hosted the Asean Finance Ministers Investors Seminar held in Hong Kong on October 9.
The proposed assimilation will range across 12 industrial sectors, including agriculture and fisheries, electronics, healthcare, textiles and tourism.
More controversially, it would require “monetary and financial integration within Asean”. But, the region contains a diversity of political systems and problems, cultures, economic structures and, most of all, wealth. More simply, it includes Singapore and Myanmar.
As Tharman Shanmugaratnam, Singapore’s finance minister, pointed out: it is essential to forge closer ties in the real economy and trade, before moving towards political and monetary union. “You can’t put the cart before the horse,” he said.
Shanmugaratnam also warned against complacency. Economic indicators are encouraging, but the region’s path towards prosperity is not predetermined. Mistakes can easily be made. And, although the prospects for Europe and the US continue to weaken as they prefer the temporary palliatives of liquidity injections and avoid necessary structural reforms, there is a “cascading spill-over” into Asean.
“There is nothing assured about Asean’s success and rise, nor can it be assumed that the West is in terminal decline,” he said. “We have to be on our guard.”
Nevertheless, the region contains stable economies and clear-sighted policymakers who recognise the importance of laying down the basics for long-term, not ephemeral, growth and prosperity.
Asean’s key strengths lie in its urbanisation process, youthful demographics and a surge in intra-regional trade.
Urbanisation is concurrent with and helping to form affluent middle classes, which is creating demand for utilities, IT and consumer goods. More than that, it has a beneficial supply-side effect — “an agglomeration of scale” — that rapidly creates greater efficiencies.
As is well known. the region’s population is young — although not Singapore’s — and this should further improve the “supply-side transition”, as skills are raised and higher educational standards are attained.
In addition, intra-regional trade and investment has increased significantly, especially during the past five years, and there is “plenty of scope for further expansion”. Already, about 40% of Asean’s trade is within the region, although Shanmugaratnam conceded that half of it eventually reaches other advanced countries outside the region.
Nevertheless, there is a greater economic cohesion about Asean that should be a guiding force for growth. Many nations are well placed to move up the value chain, while poorer countries are attracting manufacturers relocating from higher labour-cost bases in coastal China.
Most importantly, the strength and prudence of the region’s banking systems can attract foreign capital.
The next 10 years will be the decade of Asean capital markets, as global pension funds and other institutional investors abandon their home bias in their search for higher yielding assets, argued Shanmugaratnam. He predicted that portfolio flows to the region could increase at an annual rate of 5%, or by $2 trillion a year.
“But it’s essential that these inflows make a positive contribution, for instance channelled to infrastructure bonds and project finance, rather than have a destabilising, bubble-inducing effect,” he said.
