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High Yield
Equity Income


The ASEAN economic community:

A new diverse investment universe?
Earlier this year, central bank governors in

In-Bok Song,
the 10-member bloc of the Association of
East Asian Nations (ASEAN) declared
senior research South
their intention to integrate their economies and
to establish the ASEAN Economic Community
analyst at
(AEC) by 2015. They plan to create a single market
Matthews Asia, and production base, transforming South East
Asia into a more integrated region with liberalised
explores the
trade for goods and services, investment and
skilled labour, and a freer flow of capital.
challenges of
So what does greater economic integration
mean for investors in Asia? How much progress
has already been made? And what steps does
ten Asian
ASEAN need to take to capitalise upon the AECs
economies to potential?
Long-term plans
establish the
Anecdotal evidence from meeting with
companies in South East Asia suggests they
first ASEAN
are increasingly positioning their long-term
investment plans under the framework of the
AEC. This includes exploring ways to expand
their home market footprint into neighbouring
by 2015
From a broader perspective, member countries

Combined population
of ASEAN countries

ASEAN Socio-Cultural Community. These two

other communities aim to address issues such as
strengthening democratic processes and human
rights, enhancing governance and developing
human resources all critical for smooth
interregional flow of services and skilled labour.
Under these two pillars, a special court system
has been proposed to adjudicate disputes,
and efforts to foster the adoption of universal
access to primary education and widespread
use of the English language are being promoted.
These initiatives are particularly welcomed
by business owners and workers on the
ground, as they are eager to improve their own
Another step in the process would be to allow
a better flow of capital to tap access to money
beyond the current channels of foreign direct
investment. This would bode particularly well
for investors by enlarging ASEANs investable
universe. Easier flow of capital might be
implemented through an integrated capital
market involving equities, bonds and currencies.


hope to create a more globally competitive

Perhaps not surprisingly, along with these
economic bloc, and to leverage the regions
loftier goals come bigger challenges. One
advantages such as its demographic base. The
immediate challenge is enforcement power. The
ASEAN countries boast a combined population
AEC emphasises consensus building and nonThe average age in
of approximately 600 million, nearly half the size
interference in order to maintain stability. ASEAN,
south east Asia
of China. The average age in South East Asia is
so far, has not pursued the type of tight unified
30, compared to 38 for China and 44 for Japan.
block found among European Union members.
This is encouraging in terms of prospective
Rather, it seems to prefer a looser structure.
labour force growth. By purchasing power,
Without enforcement power, members may find
ASEANs middle class comprises roughly 18% of
it difficult to advance their objectives given their
its overall population, and is expected to surpass
wide-ranging stages of economic development.
25% by 2015.
For example, some member nations may seek
The desire amongst ASEAN countries to
to remove trade tariffs while others are seeking
work together has been there for a long time.
to protect important domestic industries by
ASEAN middle class
Since ASEAN was established in 1967, several
categorising them as strategic or economically
represents 18% of its
key trading agreements have been developed
sensitive. Malaysia has done this with its autooverall population
including the ASEAN Free Trade Agreement in
industry, and Indonesia has endeavoured to
1992. However, despite these pacts, member
protect its mining industries from tariff removals.
countries have grown less dependent on each other. Over the
ASEANs financial sector, especially banks, may face even
last four decades, GDP per capita of the five ASEAN founding
greater integration challenges. Laws which limit ownership of
members Indonesia, Malaysia, the Philippines, Singapore
domestic banks and other regulations restricting the opening of
and Thailand has expanded by at least ten times, and in some
foreign bank branches in each country are difficult to change.
cases as much as 70 times. However, against that backdrop,
intra-ASEAN trade has increased by only 15%-25%. This may
seem low compared to 54% for the European Union, and
The wide gap in development between the ASEAN countries
48% for the trilateral trade bloc which makes up the North
makes enforcement more challenging, particularly when
American Free Trade Agreement.
member countries are incentivised to consider protectionism
The reasons for ASEANs slow integration may be attributed
first. This is reinforced by the wide dispersion in competitiveto cultural and political diversity and wide disparity in
ness among the ASEAN countries. According to the World
economic development.
Economic Forums Global Competitiveness Report 2012-2013,
Singapore was in second position out of a sample of 144 counCross-border integration
tries, Indonesia lies in 50th place, while Cambodia is at 85.
Despite the hurdles, one of the key benefits in the AEC initiaSo what do the ASEAN nations need to do ahead of the AECs
tive is the opportunity it presents for member countries to
establishment in 2015 and beyond? Better infrastructure will
rethink their competitiveness.
be the first, crucial move towards cross-border supply chain
Just how much additional GDP growth can be achieved with
integration. Every ASEAN country has varying resources and
a system such as the AEC is arguable. However, the impact
competitive advantages. In order for these countries to act as a
on growth could clearly be meaningful. More importantly,
single production base at a competitive cost, dependable roads,
as countries prepare for integration, we can expect the
railways and airports are essential.
development of a more sophisticated and diverse investment
Secondly, the AEC framework is supported by two other
universe to become one of the key benefits of the AEC.
pillars: the ASEAN Political-Security Community, and the

30 years


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