FORMOSO, CHRISTOPHER

Econ401SU
Case Study #3 - ASEAN Economic Community: What is it to SMEs?
Introduction
It has been almost fifty years since the establishment of the Association of
Southeast Asian Nations (ASEAN) yet most people know little to nothing about
this association. The founding members Indonesia, Malaysia, Thailand,
Singapore and the Philippines, established the ASEAN on August 8, 1967.
Eventually other neighboring countries joined, in 1984 Brunei Darussalam, 1995
Vietnam, 1997 Laos and Myanmar, and 1999 Cambodia, making up todays 10
member States of the ASEAN.
The ASEANs aims and purpose according the ASEAN Declaration (Bangkok
Declaration) include cooperation in the economic, social, cultural, technical,
education and other fields, and regional peace and stability through justice and
rule of law and adherence to the principles under the United Nations Charter.
Taking this further, the establishment of the ASEAN Economic community to unify
and integrate the regions nations, we can begin to see more participation in the
region from the professional and small and medium enterprise industries.
All of the above sound well and good but what does it really mean for us ordinary
citizens? As business owners how does it affect our trade? This paper explores
the aims of the ASEAN Economic Community and its foundations to get a better
understanding of how the business environment will. And with this information,
hopefully inspire the creation of new strategies to adapt to these changes.
The ASEAN Economic Community
In 2003, the Association of Southeast Asian Nations (ASEAN) set 2020 as the
target date for the establishment of the Asean Economic Community (AEC). But
in 2007, the target was moved up to this year December 31, 2015. In the same
spirit of the North American Free Trade agreement (NAFTA) and the European

Union (EU) was to establish a single and uniform economic entity, the ASEAN
agreed to establish the AEC to create a stronger and more unified economic
environment for all member nations to uphold peace and increase economic
growth.
The vision for the AEC is to be accomplished through its four pillars. The first of
which is the transformation of the ASEAN, of all 10 member countries, into a
single market and production base. Through the free flow of goods, services,
investment, capital and labor, the AEC creates a single territory for consumption
and production.
The second pillar is the creation of a competitive economic region utilising an
interconnected network of related policy making agencies. This would also cover
the creation of consumer protection standards and the establishment of an
ASEAN intellectual property system.
The third pillar is equitable economic development through the reduction of
development gaps among member nations and the development of small and
medium enterprises. The association has identified that growing SME innovation
networks and capacity building projects is key to equitable economic
development or inclusive growth. Reducing development gaps between member
nations through technical assistance programs are being strengthened as well
especially for the CLMV countries (Cambodia, Laos, Myanmar and Vietnam).
The fourth pillar is the unified integration of the AEC into the global economy
including external economic relations and strengthening linkages to the global
supply chain. In pushing for the 3 pillars above, we put ourselves in a stronger
position in developing ties with the big nations who play critical roles in the global
market place. The creation of trade agreements with the ASEAN+3 (China,
Japan, Korea), India, and Australia New Zealand seek to establish the ASEAN as
a unified consumer and producer ripe for investment and trade opportunities.

Basic Facts about SMEs in the Country

According to the latest data from the Department of Trade and Industry (DTI),
Small and Medium Enterprises (SME) in the Philippines account for 99.6% of all
registered businesses, employ more than 60% of the labor force and contribute
16% to 35% of exports. These types of statistics can be seen throughout the
ASEAN. But despite the weight of the collective small and medium enterprises in
the economy, not much has been done toward a concerted major development of
a roadmap for SMEs.
On one hand the Philippines has been hailed as the top in Asia and third in the
world for financial inclusion by the Economist Intelligence Unit (EIU) mainly due
to the development of the microfinance industry. While on the other hand, we see
reports on the absolute wealth increase of the Philippines 40 wealthiest ($13B)
accounting to 76% of our absolute GDP increase ($17B). The statistic indicates a
very top heavy growth of the nation with minimal trickle down effect and ought to
be a concern especially when compared to other countries like Japan (2.8%) and
Malaysia (5.6%).
Advantages to SMEs
One major advantage the AEC presents is the widening of the potential market
that entrepreneurs can serve. One of the challenges entrepreneurs face when
starting a business is being able to create a product that would fit a wide enough
market to create enough profit for long-term sustainability. And with the ASEANs
600 million large population now accessible due to the AEC, even the most niche
businesses will be able to find its place.
One other advantage that might take time for entrepreneurs to adjust is the ability
to source or produce components of their products or services that they before
had only the option of the local labor or producers to fulfill. This has the potential
to lower their costs of doing business and increase the capacity at which they are

able to produce qualitatively and/or quantitatively.

The above benefits are more of the direct advantages which SMEs will be able to
benefit from the establishment of the AEC but one indirect advantage would go
toward the open comparison among the association nation members. As the
saying goes, every business has a silent partner when starting his business, and
thats the government raking in a percentage of profits as taxes. With a stronger
awareness and savvy business owners gain from doing cross border regional
trade, governments would have to also begin to reassess their policies and be
more competitive in attracting businesses.
Disadvantages to SMEs
Noting all of the advantages of the AEC is important for SMEs to take advantage
of this inevitable change but disadvantages need equal if not the most attention,
as these could be crucial to survival.
One of the most obvious disadvantages of the AEC to SMEs are the potential
new entrants to the country that might have absolute advantage over their trade
whether in the quality of their offering or economies of scale. New entrants may
come in different forms, smaller, bigger, better, cheaper or just different. Any of
them could negatively affect market shares.
Coupled with the above would be having to deal with more bureaucracy. Now
that SMEs will face not only local but regional competition, this would mean
having to consider bringing business outside or inside of their home countries.
The AEC may provide us with a single customs and certification system for
cross-border trade, but in the event of failure either in transit or otherwise, the
entrepreneur would have to deal with different national borders. This would entail
legal fees to navigate the local regulation system.
SMEs will be losers in the integration

My personal view of this is yes, SMEs in general would be losers in the

integration especially in the short-run. SMEs will be outgunned and
outnumbered. Majority of the SMEs are not even aware of the kind of change
that is taking place and despite the inevitability of this change, most are still going
on with business as usual. As economists have pointed out, there will be no
sudden change that will happen but a gradual and subtle shift in the business
environment. Some might see this as a good thing as it supposedly makes it
easier for everyone to adjust, but reality is that people usually take notice too
late.
I believe the AEC is a step toward a better economic life but for those that wont
begin to take action immediately and create new strategies to deal with new
competition, they might find themselves blindsided and knocked out by their
regional competition. But with or without the AEC, isnt this what we should be
doing anyhow as business owners?
Conclusion
The AEC, given all of its intricacies, features and details, is hard to fully
understand and master. We might not be able to understand the AEC in its
entirety but we need to acknowledge that these are inevitable changes to our
business environment. As SMEs, we have to look at how we will survive and
thrive on daily basis. And the only way to do this is through the mastery of our
trade recognizing our own strengths and weaknesses within and without borders.
As business owners, we do not have the luxury of labeling change such as the
AEC as good or bad. All that we have is the privilege of seeing this as a new
landscape of where we might be able to apply our trade and further our mastery.
It is up to us whether we use this change to our advantage or as something that
might permanently hurt us. We need to see this as a mere expansion of our
playing field and with it comes new players. It must serve as a wake up call to
action and not as a harbinger of doom because there really is no other more

appropriate response. At the end of the day whether or not the AEC affects us we
would have become better off.

Listings
Paderanga, C. (2014, July 26). Economic Issues: International Economics
Lagua, B. (n.d.). SME Characteristics and Statistical Needs in the Philippines.
Habito, C. (n.d.). Small & Medium Enterprises: Key to Inclusive Growth in the
Philippines.
Habito, C. (2015, June 24). The Asean Economic Community and Philippine
Business: Implications and Imperatives.
ASEAN Economic Community Blueprint. (2008, January).
Galang, M. (n.d.) The ASEAN Way: A Barrier to the 2015 ASEAN Integration?
ASEAN Economic Community Chartbook 2014. (2014, December).
SME Guidebook Towards the AEC 2015. (2013, November).
Thinking Globally, Prospering Regionally. (2014, April).
Aldaba, R. (2013, January). ASEAN Economic Community 2015 SME
Development: Narrowing the Development Gap Measure.
Menon, J. and Melendez, A. (2015, May). Realizing an ASEAN Economic
Community: Progress and Remaining Challenges.
Cagape, W. (n.d.). ASEAN 2015: Challenges to Regional Integration, Philippines
Perspective.
ASEAN Integration 2015: A Progress Report. (2014, December).
The Founding of ASEAN. (n.d.). http://www.asean.org/asean/about-asean/history
Major Achievements. (n.d.). http://www.asean.org/communities/asean-economiccommunity/item/major-achievements
Economic Achievement. (n.d.). http://www.asean.org/asean/aboutasean/history/item/economic-achievement
Yason, S. (2014, November 10). Financial Reporting: A Challenge to SMEs
Lagua, B. (2014, December 11). The Missing Middle in SME Finance.