COVID-19 has put the biggest test yet on ASEAN. ASEAN macroeconomic fundamentals have weakened as an aftermath of the global financial crisis of 2008 felt to this day. With this weakened position and the stark development gap between member states, ASEAN integration remains uncertain. With five more years left, can ASEAN achieve its desired community?
The COVID-19 pandemic has hit ASEAN countries considerably hard. For a region that depends heavily on international trade and tourism, the pandemic has tested the resolve of ASEAN as a community.
With cases and deaths steadily increasing in the region, countries are forced to shut down borders and the healthcare system has come under heavy stress. Quarantines and lockdowns are therefore the only way to give room for the healthcare system to cope and to curb the spread.
As countries contain the spread, they are faced with an even bigger threat of economic recession. Businesses have to close and regional supply chains grind to a halt. The result so far has been devastating for ASEAN as millions of people become unemployed, driving household incomes sharply downwards, and gravely impacting consumer spending. A recession for ASEAN means many years of building up the business sector and consumer confidence again.
The history of ASEAN’s fiscal deficit and the QE debate
ASEAN Member States (AMS) are now exploring drastic measures to keep the economy afloat but are facing increasing difficulty given their weak macroeconomic fundamentals. ASEAN figures in 2018 show that many AMS have sizable debts (more than 30%) as a proportion to their GDPs, which makes them particularly vulnerable to external shocks. Fiscal deficits in the AMS essentially means less financial firepower to weather the COVID-19 storm.
The history of these deficits started from the last global financial crisis in 2008, during which the ultra-low interest rates in the US, EU and Japan, coupled with extensive Quantitative Easing (QE) programmes in these countries, triggered hot money flows into ASEAN. This rush of capital inwards fuelled an economic boom in the region, driving property prices and the exchange rates sharply upwards. Cheap credit also means unprecedented government borrowing during those boom years which stayed with us until today in the form of fiscal deficits.
Today the situation has reversed. ASEAN currencies are depreciating rapidly against the dollar, and the capital outflow out of the region is a cause of serious concern. With limited money in the public coffers, a damning pandemic and a collapsing private sector, ASEAN member states might have to resort to drastic measures to jolt their economies back to life. Some economists are even suggesting that ASEAN countries should adopt QE just like the US did, and what the EU and Japan are still currently doing.
Is this race to the hinterlands of debt ever going to stop? What impact will the incessant printing of money in countries around the world do to the global financial system?
Just as it has done to economies in the European Union and the US, QE has led to excessively low bond yields, spectacular falls in bank shares and severe income inequality in these countries, the latter of which has led to the rise of populism in Europe and America that we see today.
ASEAN’s development gap and the free trade rhetoric
Income inequality in ASEAN is also a worrying trend, and so is the development gap between AMS. Since its founding in 1967, ASEAN as a grouping has made tremendous strides as a community in three pillars; political security (being the most exposed region geopolitically to a US-China conflict), economic (being the 5th largest economy in the world) and socio-cultural (being a region with a deep-rooted cultural complex that is yet to be realised).
Due to their different experiences during the Cold War, some countries have been left far behind and some others have advanced very well. This has been the biggest bane for ASEAN integration for decades.
As an economic community, ASEAN’s objective is to transform into a region with free movement of goods, services, investment and movement of natural persons within the region by 2025. ASEAN has progressed very well on many fronts; tariff barriers coming close to zero through the ASEAN Trade in Goods Agreement (ATIGA), the 10th and final package of services liberalisation under the ASEAN Framework Agreement on Services (AFAS) is finally being concluded, the utilisation of the ASEAN single window and many others.
But ASEAN is still far from achieving a single market. Its non-trade barriers (NTBs) are still a hindrance to intra-regional trade. While tariffs are reduced to almost zero, NTBs have spiked from around 2,000 in 2015 to about 9,000 in 2019, and in the absence of a customs union, it is difficult for international investors to treat the region as a single market.
NTBs stem from concerns by the AMS about job loss, health concerns, as well as cultural and environmental protection, but these are just subtle ways to protect domestic markets against cheaper and efficient goods and services from other advanced AMS. As Gita Wirjawan, former Minister of Trade of Indonesia, argued in 2015, to open up a country’s borders to trade, we need to ascertain whether such opening is detrimental or beneficial to our economy. Relative productivity and fiscal space, for example, are crucial yardsticks to determine whether countries will get the better end of the bargain or not. For example, in 2015, Indonesia’s labour productivity per capita was US$20,000 on a PPP basis, compared to Malaysia’s US$50,000 and Singapore’s US$115,000. From these numbers alone, we can see the repercussions to Indonesia once the trade gates open fully. This explains the reason why Indonesia has always pulled back when it comes to full integration despite being one of the founding fathers of ASEAN and a major proponent of the AEC.
And these are legitimate concerns. Ever since Mexico signed on to NAFTA with the US and Canada in 1994, it has brought about only a mild impact on employment, despite bringing in more private investments. But it has wiped out family farmers and led to a net loss of 1.9 million jobs in the agricultural sector as a result of competition with the highly subsidised US agricultural industry. The story of corn in Mexico, a traditional staple of Mexican cuisine, is illustrative. As a result of NAFTA, Mexico’s multi-coloured corns are hugely depleted, making way for cheaper GMO yellow corns from the US flooding the market. The story of Mexico serves as a lesson for developing countries about what unbridled free trade agreements can do to further impoverish nations.
Despite the full rhetoric of free trade, the latest Doha Round of the WTO collapsed because of agricultural subsidies from the US and the EU. If the champions of free trade cannot relinquish their subsidies, how can they expect other countries to do the same?
In fact, Britain became a global industrial leader and empire in the 18th century precisely through heavy protectionism with tariffs and subsidies. It was only in 1860 that Britain fully switched to free trade, when its industrial supremacy was unquestioned. Today, both the UK and the US continue to promote free trade around the world, with a few exceptions especially on agriculture.
ASEAN’s roadmap to integration
In the context of ASEAN, we can see why the CLM countries (V is doing rather well now), Indonesia and the Philippines are still very reluctant to open up their borders fully to economic integration.
Is this an article to promote protectionism? Far from it. In fact, this article argues that in order to shed protectionism in ASEAN, we must first empathise the perspective of these countries in the grouping. Only then can we approach integration effectively.
Can ASEAN prevail as a community in 2025? It has a very strong chance, but it needs to make up for lost time and steer in the most realistic direction. Here are four key recommendations:
1.Sunset Law - Economic nationalism and infant industry protection are similar but vastly different in intent and purpose. ASEAN countries lean towards the latter because they signed up for ASEAN economic integration and the globalisation of ASEAN under the 5th pillar of AEC 2025. Therefore, their protectionism is time sensitive. All policymakers need to do then is to implement a “Sunset Law” to enforce a period or milestone calendar on their protected industries and monitored closely by the ASEAN Secretariat. This should not be a punitive law, but towards encouragement.
2.Investment and Financial Integration - Since it is in the interest of ASEAN that all AMS develop their economies to a certain agreed standard, the focus of the ASEAN secretariat should be on investment and financial integration as a matter of priority, rather than an overemphasis on goods, services and persons. This is because if the economic destiny of AMS is intertwined, it will give ASEAN integration a more concerted push. Goods, services and persons will follow suit. Hence the ASEAN Trading Link must be revived at all cost to integrate stock exchanges for unfettered cross-border investments. And this is not just for Malaysia and Singapore, but for the whole of ASEAN especially the CLM countries. It is futile to expect integration of an economic community between countries with different economic destinies.
3.Revitalise Asa - COVID-19 and other pandemics will continue to test ASEAN’s financial resilience as a community. But sole reliance on multilateral swap arrangements such as the Chiangmai Initiative Multilateralisation (CMIM) will greatly undermine ASEAN’s own financial cooperation and expose it to the dictates of multilateral institutions such as the IMF through ASEAN’s +3 partners (who are shareholders of IMF and members of CMIM). ASEAN should revitalise its swap arrangement (Asa) established in 1977 since AMS now have a combined international reserves position of more than US$900 billion. At least US$50 billion can be used to set up an emergency fund for COVID-19. QE should always be seen as a last resort when all else fails.
4.Development over Integration - Rather than focus solely on textbook economic integration measures, ASEAN should focus instead on development roadmaps for each AMS. The ASEAN secretariat therefore assumes a central role as coordinator of developmental progress for each country, prompting AMS to shift their attention inwards into improving their own models and structures, before reaching outwards for integration. ERIA’s Prof Fukunari Kimura offers an interesting glimpse of a 3-tier roadmap that ASEAN can further develop as its own.
The first step towards economic integration is always to realise that the whole is greater than the sum of its parts. ASEAN will only truly move forward as a strong community when it sheds its individual interests and embraces the collective, and the promising future it brings.
Fazil Irwan Som, who holds a Masters in Southeast Asian Studies from SOAS London, is the Executive Director of the International Strategy Institute with a deep interest in ASEAN integration. He has been involved in ASEAN integration work during his tenure at the Institute of Strategic and International Studies (ISIS) Malaysia. The views expressed in this article are his own and do not represent any organisation.