An economically integrated Asean has long been an aspiration for many regional leaders and business executives.
At the heart of the opportunity is the prize of a potential common market of 10 countries and 600m people which already generates some $2.4 trillion of GDP per annum. If Asean were a country, it would rank around 7th largest in the world on this measure.
Removing internal barriers to the free movement of goods and people would enhance competitiveness, and accelerate trade within Asean, as well as from Asean to the rest of Asia and the world. The potential for local companies is enormous. Global investors have also wondered what it will take to transform the dream into reality.
To be fair, Asean, formed in 1967 as a political and economic alliance, has been working with member states for two decades on the challenge. A major initiative was the Asean Free Trade Agreement (AFTA) of 1992, aimed at sharpening Asean's competitive edge by eliminating tariff and non-tariff barriers. In 2007 came the launch of the Asean Economic Community (AEC) initiative.
The AEC has four goals: to turn Asean into a single market; to ensure Asean’s competitive edge in the region; to create a region of “equitable economic development”; and to help ensure the region is fully incorporated into the global economy. These pillars are core to plan of achieving economic integration by 2015.
However, there have been a number of hurdles. For example, Asean’s consensus-based approach poses a barrier to effective integration, as some members inevitably prioritise their own domestic economic and political interests ahead of the region.
Hence we see differing approaches to addressing territorial disputes with China. While some members openly challenge China’s marine and territorial claims, others remain deferentially silent in favor of courting China as they seek closer ties with the regional super-power.
Delays in eliminating non-tariff barriers and the liberalisation of services are another hurdle to integration. These are reflected in attempts to implement AEC initiatives in two key sectors: aviation and healthcare.
In aviation, the Asean Single Aviation Market (SAM) or “open skies” initiative aims to liberalise air transportation. There has been progress in SAM with the adoption and implementation of multilateral agreements by a few member states (ie Singapore, Malaysia and Thailand). However, other members – such as Indonesia and the Philippines – are yet to ratify these agreements. This may reflect a desire to protect national champions and other vested interests.
Asean airlines face market access barriers within the region, particularly around freedom of the air. These enumerated freedoms grant one country’s airlines the right to enter and land in another’s territory. Existing agreements only allow up to “fifth freedom” rights (ie the right to carry passengers between two other countries on a flight originating or ending in one’s own country). For example, a Malaysian carrier might drop or collect passengers in Thailand on a flight from Malaysia to Vietnam.
“Seventh freedom” rights (ie to carry passengers between two foreign countries on flights entirely outside the home country) and allowing domestic operations have yet to be adopted. For example, a Malaysian carrier cannot connect cities Thailand and the the Philippines unless the flight originates or terminates in Malaysia. Likewise a Indonesian carriers cannot connect two cities in the Philippines.
These restrictions obviously limit the flexibility of carriers in operating freely and efficiently within Asean, thus reducing current and future competitiveness. However, models of successful solutions do exist. The EU-US Open Skies agreement of 2007 is an example of what can be achieved. Both parties overlooked short-sighted interests and today reap economic benefits brought from efficiency and competition.
Restrictions on ownership and control also remain a major hurdle in the aviation industry. Such limits hamper inward foreign investments, especially those seeking majority stake or control of a carrier. They also poses a challenge for carriers who seek capital to expand.
There are other policy barriers that hinder progress of the AEC. Only half Asean’s members allow full foreign ownership of domestic companies, which again create obstacles for foreign investment.
This is particularly visible in healthcare, with adverse implications for patients and medical staff.
For example, most member states are yet to adopt the Mutual Recognition Arrangements (MRA) framework to recognize professional medical qualifications of fellow Asean countries. Further, some countries require medical exams to be taken only in their own language.
The restrictions limit the ability of qualified medical professionals from inside and outside Asean to practice in less developed countries, like Cambodia and Lao PDR. Inflexible immigration policies, such as exit visas and charges, discourage some medical travelers seeking treatment in fellow Asean states.
Although policy barriers remain a major hurdle to healthcare integration, they are not the only issue. Constraints in infrastructure, shortages of qualified healthcare professionals and cultural and linguistic barriers all present significant challenges to effective and efficient healthcare of a comparable standard across Asean.
For these and other reasons, overcoming the challenges facing Asean economic integration will clearly be no easy task. However, with a framework for progress already agreed, it’s now down to political will to push forward Asean’s bold economic agenda and capture the prize of economic integration.
Nicholas Bloy is one of the three founders of Navis Capital Partners. Navis currently manages $5 billion in private and public equity funds. Prior to co-founding Navis, Bloy was with The Boston Consulting Group in Asia from 1989 to 1999 after spending 3 years with Bain & Co in London.
