1

Opportunity and Challenges of the ASEAN- Community for its Latecomers

2013/05/31

Deng-Shing Huang
dhaung@econ.sinica.edu.tw
Institute of Economics, Academia Sinica
Ying-Chih, Sun
Institute of Economics, Academia Sinica
Yo-Yi Huang
Institute of Applied Economics, National Taiwan Ocean University


Compared with other ASEAN countries, Vietnam, Lao PDR, Cambodia and Myanmar
opened more lately to external market economies. Based on the observations of trade
and FDI relations among the region, in this paper we will address the following issues:
How will the ASEAN-Community 2015 affect the 4 countries? Are they ready to join
as a single market with other more developed neighboring countries? Can their
national business systemsinstitution, social norms etc. take the dramatic impacts
from a common market economic activities. Will they become the next emerging
economies (flying geese)? Or become another enclave processing zones? (sitting
ducks).


Keywords:
FTA, Sub-regional Cooperation/ GMS, Growth Triangle, Financial Turmoil


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1 Introduction
In the 2003 summit meeting, ASEAN officially announced the plan of forming
the ASEAN Community (AC) in 2020. The year was rescheduled by 5 years earlier to
2015 in the 2007s Summit. According to designing the 2015 ASEAN Community,
there are three pillars: ASEAN Political-Security Community (APSC), ASEAN
Economic Community (AEC), and ASEAN Socio-Cultural Community (ASCC). In
this paper we focus on the economic aspect of the upcoming community, that is, the
role for AEC. More specifically, we will elaborate the likely impact of the AEC on the
ASEAN member countries, especially for the four lately opened countries, of Vietnam,
Lao, Myanmar and Cambodia.
Clearly the ten member countries of the ASEAN are quite heterogeneous not
only in the aspects of institutional regime, but also in the stage of economic
development. As one of the four dragons in the 1980s, Singapore is far more
advanced in economic development than all the other nine countries, and with the 2
nd

highest national income in the ASEAN. Bruneis national income ranks the first in
ASEAN for its uniqueness as an oil-rich economy. Malaysia, Thailand, Indonesia and
Philippine are named as four-tiger in the late 1980s and early 1990s before the
financial crisis burst out in 1997, for its average growth rate of 9% during the period.
The other four members, including Vietnam, Lao, Cambodia and Myanmar, are in
general with communism or socialism political regime. Being lately open to the rest
of the free market world, they are relatively less industrialized, and thus have much
lower income.
In brief, the ten members can be categorized into several tiers in the
development stage. Singapore the first tier, belonging to one of the flying-geese of the
four-dragon, that have followed the leading goose of Japan to receive its declining
industries especially the consumer electronics in the late 1960s and early 1970s. Then
the four-tiger, that succeed the four-dragon in the early 1980s to launch a highly
growth period untill 1997, when the financial crisis occurred. Then, follower is
Vietnam, that adopted the economic reform policy in 1986 and by that it has
attracted many of the FDI from abroad, which contains those de-investment capital
from other ASEAN and China. The last tier goes to Lao, Cambodia and Myanmar in
the late 1990s, characterized as socialism or communism with less market efficiency,
and less industrialized.
By definition, member countries in an economic community are deeply
integrated, not only in free trade but also in free factor mobility. Difference in the
stage of development between countries makes better gains from free trade. However,
the less development country may encounter the problem of retarding the speed of
industrialization, for its manufacturing industry is less competitive. Rich in unskilled
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labor but shortage in capital and technology will make the less-developed economy
even worse. Especially under the regime of free factor movement, it is likely that we
expect the late comers will attract only those FDI with low skilled production
activities.
History does not lack of successful model, that open policy will attract FDI and
fuel the engine of growth. A typical example is the NIEs or 4-dragons in the 1970s
and early 1980s. The NIEs established their own capital and entrepreneurship after
having served as the production yard for U.S. and/or Japans manufacturing
industries.
1
On the contrary, the 4-tiger of ASEAN in the late 1980s received FDI
from Japan and U.S and even from the former tier of flying-geese of 4-dragon,
triggered a economic booming period before the eve of 1997 financial crisis.
Unfortunately, the opening up of China then attracted the FDI out of the 4-tiger, and
thus damaged the growth of the ASEAN-4 tiger. Clearly, unlike the 4-tigers failure,
what makes the 4-dragon a success model of opening-up policy is the ability to absorb
the technology from the FDI firms, and to establish their own entrepreneurship.
Whether the four ASEANs latecomers will be benefited from opening-up, especially
from joining the upcoming ASEAN economic community is worth studying.
In what follows, Section 2 briefly reviews the history of ASEAN development.
Section 3 discusses the four latecomers economic reform and its current economic
performance. Section 4 analyzes the degree of economic integration from economic
statistics. Section 5 discuss the opportunity and challenges for the four lately opened
countries. Section 6 concludes the paper.

2 A Brief History of the ASEAN Development
Following the so-called East Asian miracle in the 1980s made by the four-dragon
of Taiwan, Hong Kong, South Korea and Singapore, the four-tiger in ASEAN
countries, namely Malaysia, Thailand, Philippine and Indonesia, began a fast growing
period in the late 1980s. Their average growth rate reached to 8% during the
significant booming period from 1987 to 1996, before the financial crisis.
2
Thailands
GDP growth rate even reached the peak of 13.29% in 1988, ranked as the fast
growing nation among its neighboring countries, as shown in Figure 1. Ironically,
Thailand is also the initiating country to burst out the Asian financial crisis in July 2,
1997. Right after the Central Bank of Thailands announcement of not defending its
currency, and the Thai-currency depreciated dramatically by more than 16% in one
day. The currency crisis spread quickly over to his neighboring countries of Indonesia,

1
For the flying-geese paradigm model in the 4-dragon and 4-tiger, refers to Huang (1998, 2000a,
2000b),Chen and Huang(2009). For the discussion on the role of FDI for economic development of
Southeast Asia refers to Huang (2012). And Song (2008).
2
The economic related statistics are based on UNCTAD, unless specified otherwise.
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Malaysia, Philippine and Singapore, and even further to other East Asian countries of
Japan, South Korea, and shaking the foreign exchange market of Hong Kong and
Taiwan.
As shown in Figure 1, a significant booming period appears during the period
from 1985 to 1997. With an optimistic economic future, in the year of 1993, the 5
th

ASEAN Summit in Thailand announced to create the ASEAN Free Trade Area
(denoted as AFTA hereafter) by the year of 2003. So far so good is it until the
outbreak of the financial crisis. The outburst of financial crisis in 1997 enhanced the
further movement to have more intensive regional integration. Specifically, following
the joining of Vietnam in 1995, the ASEAN expanded by having three new member
countries in two years after the financial crisis. That is, Lao became a member in 1997
and Myanmar in 1998 and Cambodia in 1998. By the end of 1998, the ASEAN has
already contained ten nations, with more than 0.59 billions of people (9.4% of the
world total).

In addition to member expansion in the late 1990s, ASEAN aggressively extends
its external economic integration. China, South Korea and Japan were invited to
attend the ASEAN Forum in 1998, forming a so-called ASEAN Plus Three (APT) to
pursue more comprehensive economic partnership. In 2005, ASEAN announced the
plan to recruit more economic partnership countries of Australia, New Zealand and
India, that is, ASEAN Plus Six.

3 The Latecomers Reforms and its Economic Performance
Vietnam leads the four late comers in the Southeast Asia, when the government
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announced the so-called Doi-Moi, or economic renovation polices in 1985. Shortly
after the open policy, FDI into Vietnam increased sharply. In 1995 when Vietnam
joined the ASEAN, the total FDI hit the record high of 10.16 billion US dollar. The
inward FDI to Vietnam decreased after the 1997 financial crisis. However it began
to surge dramatically after 2003, when Chinas new Labor Law effectively raised the
labor cost in China.
Next to Vietnams open policy is Laos New Economic Mechanism in 1990. By
the policy, the government began to lift the market regulations, in order to stimulate
the economic activities in the private sector. One month after the burst out of the
Asian financial crisis, announced in the 30
th
annual conference on August 11, 1997,
both Lao and Myanmar became the new members. The last country joining ASEAN is
Cambodia. It was not until April 30, 1999 Cambodia was accepted to become a formal
ASEAN member.
According to the national income per capita, the ten member countries of ASEAN
can be categorized into three groups. As is listed in Table1, Singapore and Brunei
have the highest income level, with 40.07 thousand and 31.80 thousand US dollars
respectively in 2011. The 2
nd
high groups are the 4-tiger, i.e., Malaysia, Thailand,
Indonesia and Philippine. The last groups with the lowest national income are the four
lately open nations, Vietnam, Lao, Cambodia and Myanmar. And as expected, the
earliest opened Vietnam having a high economic growth rate earlier and thus have
extremely higher income level than others.

Table 1 Selected Economic Indicators2011
ASEAN
Country Size
Square KM
Population
(thousands)
GNP per Capita
Current US$
2011/2004/2000
Singapore 700 5,077 40,070/ /
Brunei 5,270 399 31,800/ /
Malaysia 328,550 28,401 7,760/ /
Thailand 510,890 69,122 4,150/ /
Indonesia 1,811,570 239,870 2,500/ /
Philippine 298,170 93,261 2,060/ /
Vietnam 310,070 86,928 1,160/550/291
Lao PDR 230,800 6,201 1,040/423/350
Cambodia 176,520 14,139 750/353/185
Myanmar 653,520 47,963 419/na/214
Data sources: World Bank (WDI2011), ASEAN Secretariat2012

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For the four latecomers, their economy has been growing dramatically since
2000, as reflected by the GDP per capita. As shown in Table 1, Vietnam grows by
3.98 times from 2000s 291 US$ to 1160 US$, that is, 13.43% of the average annual
growth rate. Similarly, we observed a double digit growth rate for Lao for the same
period from 350 US$ to 1040 US$, or 10.41% of annual growth rate. However, for
the other two countries, the economic performance is much lower. Cambodia grows
from 185 US$ to 750 US$, or 13.56% and Myanmar from 214 US$ to 419 US$, with
growth rate of 6.29%.
Lower income level implies lower wage rate and cheaper labor cost for firms,
making the country an attractive site for the foreign direct investment (FDI) in labor
intensive manufacturing sectors. The four latecomers of ASEAN are of no exception.
In 2003 when Chinas labor cost doubled, Vietnam began to receive many
multinational firms investment. As a result, FDI in Vietnam surged, and the economy
grows sharply. Similarly, we may expect the likely effect occurs to the other threes of
Lao, Cambodia and Myanmar.
4. Economic Integration in ASEAN
4.1 Intra-Regional Trade in ASEAN
To estimate the barrier toward a economic community, Intra-regional trade is an
important index. Theoretically, the more the intra-region trade for the potential
member countries as a whole, the more likely they are economically complimented
with each other. On the contrary, when the potential member countries relied on
trade with the rest of the world, then the regional economic integration by tariff lifting
or freeing the factor flows is more likely to be harmful.


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Figure 2 Intra-ASEAN Tens Trade Share


The economic integration of ASEAN observed from the intra-region trade share,
is depicted as in Figure 2. During the economic booming period of ASEAN in the
decade after the mid-1980s, the intra-ASEAN10 increased sharply from about 15.5%
to slightly higher than 25%.
3
During the recession period after the financial crisis,
the intra-regional trade volume decreased significantly from around 24% to 22.25% in
2004. As we can see, the intra-regional import share decreased by greater degree than
the intra-regional export share. This phenomenon indicates the region as a whole is
running export surplus to the rest of the world. The share then moved upward to the
level of 25.24% in 2005 and retains to 26% around afterward. This level is much
less than 50%, the intra-Europe trade share the years before EEC was formed. That is
unlike the EECs path, the economic community for ASEAN would face higher
resistance from member countries.

4.2 FDI and Intra-Regional FDI in ASEAN
In general ASEAN members are competing with each other for attracting FDI in
the past, and the competition situation seems no sign of changing in the near future. In
this regard, the more they are relies on the FDI to stimulate economic development,

3
To be statistically consistent, all the ten countries are counted also the four latecomers were not the
member during the period.
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the fiercer is the competition. This is a negative sign for the moving toward a deeper
economic integration for the ASEAN.
The share of FDI to ASEAN, defined as the ratio of total FDI to ASEAN-10 to
the worlds total FDI is illustrated in Figure 3. During the economic booming period
beginning the early 1990s, we observed the highest share of world FDI into ASEAN.
The peak of FDI share, level of 8.85%, appears in 1991, and it remains around 8%
before the 1997 financial crisis. Another peak occurred in 2004, counted 4.9%, one
year after the effectiveness of Chinas wage jumped almost doubled due to its new
labor law. After the 2008 world financial crisis, the FDI increased dramatically to
6.36%.

Figure 3 Share of Inward FDI of ASEAN
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Another window to observe the integrated ASEAN is looking at the FDI source,
especially the FDI from intra-ASEAN itself, displayed in Figure 4. As depicted in
the figure, from period of 1995 to 2005, to the period from 2007 and 2009, the ratio of
the FDI sourced from non-ASEAN regions declined, except those from China and
India. FDI-source share from EU drops the most from 33.6%to 21.1%. The share
from U.S. and Canada dropped during the period from 17.9% to 10.1%, ranked as the
2
nd
largest decreasing source. On the contrary, we observe a significant increase in
the intra-ASEAN FDI, from 11.6% to 15.0%.

Figure 4 Source of Inward FDI in ASEAN

3.3 Intra-Regional FDI country-level (1995~2005)
With the most recently available statistics, we can watch the intra-regional FDI
in ASEAN by country level, as illustrated in Table 2. As we can see, Singapore and
the other three tigers of Malaysia, Thailand and Indonesia play important role in the
region in terms of FDI source. Clearly, Singapore is the major source of
intra-ASEANs FDI, accounted for 19.58 billion US$ (59.79% of total). Malaysia
source accounted for 6.35 billion US$ (19.40%), and Indonesia 3.92 billion US$
(11.97%). These four leading FDI countries are also the highest income countries in
the region. Ranking from the receiving country, Malaysia received the most, 26.14%
of the region FDI, followed by the Singapore 25.13%, Thailand 19.9% and Vietnam
9.47%, Indonesia 6.46%. Similar to the distribution of world total of FDI to ASEAN,
Vietnam received more FDI than others of Indonesia and Philippine. And, the bottom
three destination countries of FDI are Myanmar, 3.19%, Cambodia 0.69% and Lao
PDR 0.84%.
What is worth noting is that the four-newly opened countries received more FDI
12.2%
17.9%
33.6%
7.2%
1.2%
11.6%
11.5%
10.1%
21.1%
6.7%
3.2%
15.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
Japan US & CAN EU-25 Twn HK &
Kor
China,Indo,
PakiChina
ASEAN-10
1995~2005 2007~2009
10

than they have contributed to the region. This phenomenon is not surprising for they
are relatively short of capital as an less-developed and not industrialized country.

3.3 The Development of ASEAN Common Market (ASEAN-EC)
As noted earlier, in 2003 the AFTA (ASEAN FTA) was established. Accordingly, the
tariff between member countries is reduced to 5% or less. And, in the summit of 2003
summit, the Bali Concord II declared ASEAN Vision 2020, to form an ASEAN
Community. Three pillars to support the community: political-security, economic, and
social-cultural. In 2007, the Summit in Singapore decides to accelerate the
ASEAN-Community by rescheduled the effective year from 2020 to 2015. In 2010,
ASEAN plus China FTA became effective. As a result, Chinas cheap manufacturing
goods floods into ASEAN, especially in Vietnam and the Golden Triangle of
Thailand-Loa-Myanmar .
(GMS) Initiated by the Asian Development Bank, the so-called Great Mekong
River Project was launced in the early 1990 to encourage sub-regional economic
cooperation to start-jump the four economies of Thailand, Vietnam, Lao and
Cambodia. In 1992, ADB launched the Great Mekong Sub-regional (GMS)
cooperation project. In April, 1995 the Mekong River Commission (MRC) was
established, with four member countries, Thailand, Lao PDR, Cambodia and Vietnam.
According to the project, the Agreement on Sustainable Development for the Mekong
Region was undersigned.
In 1996, the MRC invited Myanmar to join. In 1996/06, the 1
st
Premier Meeting in
Malaysia, announced the formation of ASEAN-Mekong Basin Development
Cooperation (AMBDC). And, China, South Korea and Japan are invited to join the
AMBDC. In 2000, the AMBDC became effective, after a Premier Meeting in Hanoi.
By the projects of all the GMS projects, the FDI flows into the four less-developed
countries, especially to Lao PDR, Cambodia and Myanmar. Not only FDI from the
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ASEAN member countries, but also from the non-ASEAN countries like China, Japan
and South Korea. By the end of 2011, the total investment of AMBDC in Cambodia
accumulated to 594.629 million US$, of which only 17.88% comes from the host
country, according to the ADBs statistics. Corresponding numbers are 2707 milllion
US$ accounted for 5.378% for Lao PDR; 4173 million US$ and 14.319% for
Vietnam; 6588 millions US$ and 43.01% for China. Cleary, through the GMS and
the AMBDC, the four latecomers are able to receive many FDI for their basic
construction. This in turn shall have long term positive impact on their economic
growth.
5. Opportunity and Challenges for the latecomers
Economic integration from preferential tariff agreement is the first step. This
occurs to ASEAN 1992, when the CEPT is established. The FTA in 2003 is a step
forward, and ASEAN economic community in 2015 is big step, especially for the less
developed member countries, like Vietnam, Lao, Cambodia and Myanmar. For the
common market requires not only free trade, in terms of zero-tariff and lifting of all
the likely non-tariff barriers. For the late comers, the non-tariff barriers are in general
more sever and hided under social and cultural norms or business system. It usually
take more the adjustment cost to lift off those related regulations or change the
business regime.
As the integration advances to common market, then it requires the free
movements of factors, including not only the capital, labor and other production
factors. For the late comers, they usually will receive capital from other capital rich
member countries. The opportunity for the less-developed member countries is clear.
In general, inward FDI will fuel the growth engine. This is simply because that capital
is needed to jump-start the economic development, and they are short of capital. In
addition, there are also externality effects arising from the FDI to the host countries.
The positive externalities include mainly the spillover of the production technology
from the FDI firms to firms of the host countries. In addition, there is a likely of spill
over of the marketing and management skill or know. As a result, it is possible to have
the foreign firms to stimulate not only the economic growth, but also to facilitate the
nursing of local entrepreneurship, as happened in the NIEs experience in 1980s. The
later effect conditions on the human-capital of the host countries, more specifically
the education level or the ability of local entrepreneur to learn from FDI companies.
However, it may encounter the outflow of labor, which in the short term may
improve the countrys GNP, but in the long run may hurt the countrys sustainability
of economic growth. For, labor force outflow can hurt the human capital
accumulation in the long run, not to mention the negative effect on the family
structure, and thus hurt the demographic healthiness, a long-run damage to the country.
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In brief, the challenges for the members of less-developed economies may arise from
several aspects: (1) Being featured with less efficient market-transaction platform (in
terms of contract enforcement, fairly open information, blur rule of game, regulation
etc.) the spillover effect from foreign firm to local entrepreneur is less likely. (2)
FDI brings in capital aiming at using cheaper labor, so the established plant and jobs
offered are in general assembly operations, and are thus mostly so-called enclave
activities. Therefore, they have little forward or backward linkage to the domestic
economy. If this is the case, then the FDIs contribution to the host economy is of
limited and the industrialization will be retarded, not likely to create a long-run
growth. (3) In addition, there is so-called pollution import from free trade. Usually
the less-developed country has loose environmental protection, either by law or by
social customs. In this regard, it is very likely that the FDI comes not only for the
purpose of taking advantage of cheap labor, but also for lower cost
production-induced pollution. If this is the case, and very likely it is, then the
countrys short run growth due to inward FDI may in fact is at the expense of long run
sustainability.

6. Concluding Remarks
Unlike the highly interdependence situation in condition of countries forming the
European Economic Community (EEC) in the late 1970s, the ASEAN members are
relatively more heterogeneous in term of its development. ASEAN has proceeded in a
fast speed to economic integration. They established the CEPR in 1992, then ASEAN
FTA in 2003, and expected to be a common market in the near future of 2015. More
intensive integration implies the fostering of a greater economy, which in turns will
attract more the FDI from outside the ASEAN.
The opportunities for the latecomers are there. Sub-regional economic cooperation
projects, like GMS and AMBDC, does bring in FDI and thus help raising the
less-developed member countries to keep up with the regional development path,
especially for the four of Vietnam, Lao PDR, Cambodia and Myanmar. In other
words, the opportunities of successful development for the four seem fairly promising,
if they can reproduce the experience of NIEs in the 1970 and 1980s.
The history of NIEs can be duplicated here, provided there is enough
well-educated human capital to learn from multinational firms. Otherwise, the FDI
may just bring in the enclave economy, with mainly the assembly operations. That is,
there is challenge for the ASEANs last for members. (1) FDI brings in only the
enclave production activities. Without human-capital accumulation, the FDI-induced
growth cannot be sustainable. Pollution Imports are likely, which is detrimental to
the environment and thus make the FDI-induced growth appears only in the short run,
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but permanently damage the economy in the long run. (3) The national business
system, including the institution-specific problems and social norms, matters. This
will make the adjustment cost extremely higher, when common market becomes
effective. In other words, the cultural and social shock is inevitable, and thus may
increase the difficulties of transition from state control economy to market economy.

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