BRIDGING ECONOMIC DISPARITY
BRIDGING ECONOMIC DISPARITY IN ASEAN
Pulling up the economies at the bottom of Asean has become a focus of the community because only then can further regional integration occur and increased architecture be established.
The gross domestic product (GDP) of the Asean community has risen from US$391 billion in 1990 to $2.5 trillion in 2010 and is expected to hit $4.4 trillion in 2015, when the Asean Economic Community (AEC) falls into place. However, there is a great range between the richest and poorest nations. The richest country, Singapore, has a GDP per capita that is 160 times the poorest country, Laos. This economic disparity is one reason why Asean has pursued a gradual approach to economic integration without the landmark single currency employed by the European Union. Three economists, from the Asean Secretariat, the Japanese External Trade Research Organization and Credit Suisse, give their views on Asean’s economic gap and how it might be bridged.
Q: What are the ways in which the arrival of the AEC will help the poorer Asean countries? Are there drawbacks for these countries?
Pushpanathan: The AEC adopts an “inclusive approach” to integration. The lesser developed Asean countries will be given special and differential treatment in terms of a slightly longer time frame to accomplish the commitments under the AEC for specific sectors like trade but all will be completed by the time the AEC is established in 2015. These countries will be assisted through the Initiative for Asean Integration (IAI) where the more developed Asean countries as well as Asean’s Dialogue Partners and donors will provide capacity building support and assistance in a targeted manner to reduce the development gap. The key area under IAI will be the development of human capital, and strengthening institutions supporting integration. There are also other programs under the Asean process to assist these countries in specific economic areas.
Indeed, there is quite a significant economic gap between the CLMV (Cambodia, Lao PDR, Myanmar and Vietnam) countries and the rest of Asean. The value-added industry for the Asean-6 contributes around 47 percent to GDP (2006). Singapore is a service-based economy with its contribution reaching more than 65 percent of GDP. In contrast, most of CLMV countries still rely on agriculture as a driver of economic growth, contributing around 30 percent and 42 percent to Cambodia and Lao PDR economies, respectively. However, manufacturing has become Vietnam’s most important economic sector. Despite the gap in per capita incomes, the CLMV (Cambodia, Laos, Myanmar, Vietnam) countries have experienced rapid growth, ranging from 6.3 to 8.3 percent per annum, while the remaining countries in Asean grew in the range of 4.6-5.3 percent per annum. As such, being a member of Asean and economic integration is benefitting the CLMV countries.
The Asean Economic Ministers at their recent meeting in Lao PDR have agreed to shift the focus of AEC to the issue of narrowing the development gap while building a competitive Asean single market and production base.
Nishimura: The large income disparities remaining in Asean may not be solved in 2015. Also, Asean is wide and rich in diversity, from viewpoint of abundance of natural resources (minerals, agriculture, forestry and fisheries, etc.) as well. This sort of the remaining diversity is to give each region of Asean a unique locational advantage. By enhancing the goals of AEC beyond 2015, developments based on each country’s locational advantage could be more easily promoted in various regions in the Asean countries.
By undertaking policy and institutional reforms consistent with the AEC Blueprint and the WTO, Cambodia, Vietnam and to a lesser extent, Laos, have already benefited from the AEC exercise. Investments have increased tremendously in the first two countries.
The liberalization efforts in Cambodia and Vietnam have been Most Favored Nation for the most part. As a result, both countries have reduced their hitherto very heavy reliance on Asean as an export market but nonetheless increased their imports from Asean. In short, the liberalization-induced, FDI-facilitated growth of international trade led to the enhanced utilization by CLV (Cambodia, Lao PDR, and Vietnam) countries of their inherent comparative advantage, which has propelled them to be the best performers in the Asean in terms of growth rate during the past decade.
Q: Would adoption of a common currency strengthen Asean economically?Pushpanathan: In general, the benefits of currency union can easily appeal to Asean – elimination of exchange rate risks, transparent prices (therefore, more competition), and increased policy discipline. However, unlike in Europe, differences in income levels, stages of development, and economic structure in Asean make common currency arrangement more difficult for the region at this point of time. For example, Asean is still less economically self-contained. Despite the increase in intra-trade flows, Asean countries are still dependent on external trade outside the region.
Commitment to political integration will take time to evolve and mature before certain competencies may be delegated to regional institutions or mechanisms in Asean. Creation of a supranational organization within Asean is not an option for now.
Nishimura: Adoption of common currency may or may not be a part of the future economic agenda of the Asean. It is not advisable to have a common currency in the Asean in the next decade and possibly more. The differences in level of development in the Asean are too large for a common currency to be operable. A common currency demands common monetary policy and even fiscal policy if it is to be viable, as the current problems in the euro zone show because of an ineffective implementation of the Maastricht Treaty. With varied development levels and therefore development and policy imperatives, interest rates would have to be different and therefore monetary policy would have to be “independent”.
This calls for a more flexible exchange rate regime. The best that one can hope for in terms of a common currency at the moment is a common currency zone between Singapore and Malaysia and possibly Thailand. In short, a common currency at the present stage of development of the Asean countries would be ultimately disruptive for the region.
Tan: The adoption of a common currency will not strengthen Asean economically and neither is Asean ready given its heterogeneity. Asean economies are at different stages in economic development.
Standards of living are also vastly different. Financial markets are also in various different stages of development which impede the creation of a common currency. The different fiscal strengths of the various governments would also make the enforcement of a single monetary policy stance difficult in Asean. At this juncture, the adoption of a single currency for Asean would likely cause more harm than good.
for a particular situation. With the Asean Charter, there is a rules-based regime which will facilitate a positive development going forward.
Raslan: There is a strong case for an Asean Bill of Rights. Of course, enforcement and implementation would be a major challenge.
Muhiz: Such a bill would only be possible and legitimate if initiated and ratified by democratic governments in member countries.
Without this prerequisite it would be a needless magnet for divisiveness.......................
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