Indonesia moves forward with ASEAN integration

As the dominant political and economic power in the ASEAN bloc, Indonesia’s participation in the ASEAN Economic Community’s (AEC) planned integration this year will have significant ramifications for domestic growth, trade flows and immigration. Although AEC integrations is expected to significantly bolster the region’s attractiveness to foreign investment, simultaneously reducing non-trade barriers and improving the flow of goods and services, the process has not been without challenges. For Indonesia the most notable challenges have been in global volatility and a growing domestic movement to pursue national interests and expand bilateral trade, championed by the administration of newly elected President Joko Widodo.

Nonetheless, the benefits of AEC integration in areas such as e-commerce, manufacturing and exports are manifold. Although doubts remain as to whether the association will achieve AEC integration by the end of 2015 as planned, rising levels of trade and investment coupled with a host of new recently signed agreements are positive indicators of the potential benefits.

Historic Ties

Indonesia has been a member of ASEAN since August 1967, when it joined Malaysia, the Philippines, Singapore and Thailand in signing the ASEAN declaration to form an inter-governmental association aimed at improving cooperation in economic, social, cultural, technical and educational development. The five founding members were later joined by Brunei Darussalam in 1984, Vietnam in 1995, Laos and Myanmar in 1997, and Cambodia in 1999. All members are signatories to the ASEAN Free Trade Area (AFTA) agreement, which was originally established in 1992.

There is a great deal of disparity among members in the areas of economic management, culture, politics and wealth; World Bank data shows that Indonesia’s GDP per capita stood at $3475 in 2013, compared to just over $1000 in Cambodia and over $55,000 in Singapore. Meanwhile, national populations range from 417,784 in Brunei Darussalam and 5.4m in Singapore to 250m in Indonesia and 98.4m in the Philippines.

Recent Growth

According to investment firm J.P. Morgan, as of 2013 ASEAN had a population of 600m and nominal GDP of $2.3trn. It is the third-largest Asian trading partner for the US, and the largest Asian investment destination for both the US and EU. ASEAN is expected to become the fourth-largest global market after the EU, US and China by 2030, as a result of its rising middle class, increasingly educated workforce and favourable geographic positioning on trade routes through which $5.3trn in global trade moves annually.

According to a 2014 report published by the OECD, real GDP growth in emerging Asian economies, including India and China, is projected to remain robust between 2014 and 2018, with the OECD Development Centre projecting 6.9% annual growth during the period, compared to 8.6% between 2000 and 2007. The South-east Asian region’s outlook is also positive, with the OECD projecting 5.4% annual average growth to 2018. In March 2015 BMI Research reported that the ASEAN share of global GDP would rise from 3.2% to 4.7% by 2023, and its share of world trade from 5% to 6% during the same period, while combined GDP is expected to reach $6.2trn by 2023.

Economic Integration

In the aftermath of the Asian financial crisis of 1997-98, ASEAN established the AEC with the Bali Concord II in October 2003 in a bid to rebuild the region’s economies in a more secure and stable manner. The community hopes to transform ASEAN members into a single production base, which will enable free movement of goods, services, investment, skilled labour and capital. Under a binding blueprint signed in 2007, an AEC scorecard was established to track each member’s progress in the four original ASEAN pillars: a single market and production base, a competitive global region, equitable social development and integration with the global economy.

Progress

According to a 2014 report by the Asian Development Bank (ADB), progress has been mixed. Although some major strides have been made on the first pillar, with more than 70% of intra-regional trade benefitting from zero tariffs, and less than 5% of goods subject to tariffs of more than 5%, the implementation of a trade in services agreement has been much slower, in part due to powerful national service lobbies. The ADB noted steady progress in realising the goals of liberalising investment and capital flows, most notably with the signing of the ASEAN Comprehensive Investment Agreement in 2012. Perhaps more significantly, ASEAN’s original six members are moving to implement the National Single Window programme, which will liberalise services and establish a set of harmonised regulations and standards for intra-ASEAN trade, although progress on this has also been delayed.

The fourth pillar has witnessed a number of positive developments as well; the ADB noted that ASEAN has emerged as the hub of free trade agreement (FTA) activity in Asia, and has signed FTAs with Australia, China, India, Japan, South Korea and New Zealand. At the same time, negotiations for the Regional Comprehensive Economic Partnership, comprising ASEAN and its six aforementioned free trade partners, began in 2012 and could lead to the world’s largest trade bloc, with comprehensive rules covering 40% of world trade.

Progress has been more modest in the second and third pillars, with highlights including the adoption of the ASEAN Intellectual Property Rights Action Plan 2011, as well as a master plan on ASEAN connectivity, which will improve transport and energy security. The ADB has also praised ASEAN for implementing its Strategic Action Plan for Small and Medium-Sized Enterprise (SME) Development, which will guide regional SME initiatives and facilitate inclusive growth.

Impending Deadline

For now the community is working to complete integration at the end of 2015. Challenges linger, however, and much remains to be done before then, giving rise to doubts that full integration will be achieved by year-end as planned.

Global volatility is also reducing some of ASEAN’s recent gains. According to the Global Trade Alert database, non-tariff barriers have risen among ASEAN’s largest economies since the 2007-08 global financial crisis, with the agency reporting that between 2009 and 2013, a total of 186 new non-tariff barriers were implemented, including 75 by Indonesia, 39 by Vietnam, 27 by Thailand, 16 by Malaysia and 15 by Singapore.

Several key sectors of the Indonesian economy could also suffer as a result of AEC integration – AFTA’s accelerated timeline obliges the country’s banking sector to ramp up its efforts to compete with regional banks, which will be challenging considering the low interest rates on offer by banks in Singapore, Malaysia and Thailand. In the insurance sector, Antonius Anton Lie, chairman of the Education Commission of the Indonesian Insurance Council, has warned that an influx of regional insurance companies will intensify competition.

Cedric Chehab, head of research at BMI Research, has also warned that an ongoing shortage of medical professionals will be exacerbated by an expected “brain drain”, with educated health care professional seeking higher salaries elsewhere. In addition, the country’s agriculture sector could be threatened by an influx of cheaper imports. Although a number of stakeholders and policymakers have called on the government to assume a more prominent leadership role in ASEAN, the country has downplayed the importance of the regional bloc in recent months, with Widodo focusing on pursuing national rather than regional interests.

In December 2014, for example, Riza Sukma, Widodo’s foreign policy adviser and executive director of Jakarta’s Centre for Strategic and International Studies, told a forum in Washington that although the Widodo administration will maintain Indonesia’s free and active role in world affairs, foreign policy will now emphasise the development of bilateral ties, most notably with countries outside of the Asia-Pacific region.

Indeed, recent growth in bilateral trade with Japan and China (see Trade & Investment chapter) has made the ASEAN value proposition less attractive to Indonesia, while President Widodo’s goal of transforming Indonesia into a “global maritime axis” (see Transport chapter) hinges on enhancing maritime trade with India and the Gulf Cooperation Council, among others.

Benefits

Nonetheless, the potential benefits of AEC integration for Indonesia could still outweigh the drawbacks. Growth in the ASEAN region will steadily outpace that in the EU over the next 15 years, according to a 2015 BBC report. With expected average annual growth of 5% until 2030, and 10% until 2023, ASEAN growth should easily exceed the EU average of 2%.

Looking forward, trade projections are also bright. Intra-ASEAN trade represents roughly 25% of the regional total, compared to just 10% in 1995, according to figures from Malaysia’s Ministry of International Trade, with intra-ASEAN trade reaching $608.6bn in 2013, compared to $458.1bn in 2008.

ASEAN’s share of global foreign direct investment (FDI) is expected to rise from its current 10% to 12% in the coming years, with total FDI in the association reaching $122.4bn in 2013, while intra-ASEAN investment stood at $21.3bn. And despite the challenges facing some local industries, Indonesia is set to benefit.

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This article is from the Country Profile chapter of The Report: Indonesia 2015. Explore other chapters from this report.

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