Greater cooperation key for Malaysia's continuing success in ASEAN

During its time as chair of ASEAN in 2015, Malaysia helped to achieve its goal of launching the ASEAN Economic Community (AEC) by the start of 2016. The main challenge, long identified by economists and politicians, remains the vast difference in levels of development among the countries in the regional body, with Singapore enjoying GDP per capita of $70,000 and Myanmar still at $800 per capita, while Malaysia sits in between at $15,000. Malaysia has a strong incentive to bridge the gaps; however, it is faced with new protectionist sentiments in a number of countries, along with geopolitical tensions linked to territorial disputes with China. ASEAN states agreed that their philosophy and approach to integration should be based on consensus building and balancing national interests, although they also indicated that they should not attempt to replicate the EU and will not attempt to create a currency union.

Barriers

Critics say that the economic caveats and exclusions have created an excuse for political elites to move slowly on important areas of integration such as reducing the costs of cross-border transactions, harmonising rules and regulations, and, thus, increasing overall volumes of trade between neighbours. Every country in ASEAN is said to protect at least one or two key sectors from regional competition.

Malaysia has historically been sensitive about its automotive business, while Thailand has resisted giving free access to its banking and agricultural sectors. Indonesia has arguably been reluctant to open up its economy to outside mining companies and the Philippines maintains a ceiling on foreign equity participation. Consequently, experts from the World Bank and World Trade Organisation estimate the cost of conducting cross-border transactions in ASEAN is still high and can reach up to 30% of final sales cost due to the heavy burden of compliance.

During Malaysia’s chairmanship of ASEAN it faced a number of interconnected issues. A general shift toward resource nationalism and bilateralism meant the block as a whole was struggling to find a common response to territorial disputes with China. One of the key summits chaired by Malaysia last year produced a concluding statement, noting that China’s activities have “eroded trust and confidence and may undermine peace, security and stability in the South China Sea”. Leaders called for the implementation of a code of conduct with China to better manage the dispute.

Flow On Effects From Economic Union

An economically successful AEC would help to develop broader acceptance of the bloc among the peoples of its constituent member states, while the ASEAN Strategic Action Plan for SME Development (2016-25) – due for release mid-2016 – is supposed to lay down a strategy to strengthen small and medium-sized enterprises, the largest source of employment in the region.

A series of free trade agreements with third parties are also being negotiated by the bloc, including with Hong Kong, Japan and India, with the latter likely to come into force by the end of 2016. These pacts should help to boost trade volumes and further cement the bloc’s status globally.

The ASEAN summit last year also adopted the Kuala Lumpur Declaration on a People-Oriented, People-Centred ASEAN, a document that commits the bloc to implement policies that will tackle poverty and inequality. Closing the two-day summit, Malaysian Prime Minister Najib Razak said the vision of an expanding ASEAN had to be seized wholeheartedly. “We must together share our conviction and ASEAN’s time is right here, right now,” he said.

Competition From TPP

The arrival of the Trans-Pacific Partnership agreement as an alternative track has also shifted policymakers attention to what is a much more fast moving and binding set of agreements. ASEAN has evolved, but has yet to reach its goal of a genuine trading block in South-east Asia.

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The Report: Malaysia 2016

Trade & Investment chapter from The Report: Malaysia 2016

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