The Future of the ASEAN Economic Integration

This chapter explains that this study discusses ASEAN economic integration from both the perspective of time span (trade, investment, and finance) and framework (bilateral, sub-regional, regional, and regional plus). This comprehensive study of ASEAN’s economic integration is considered timely given that ASEAN was inaugurating its economic community by the end of 2015. This introduction chapter provides a brief overview of the entire chapters of the study to provide readers with a general overview of the study contents before going into the details in each chapter. It takes a comprehensive approach on the economic integration of ASEAN through an analysis of its various economic agreements from ASEAN Free Trade Area (AFTA) in Chap. 2, Bilateral Free Trade Agreement (BFTA) in Chap. 3 and the International Tripartite Rubber Organization (ITRO) in Chap. 4. All of these chapters discuss how these several economic arrangements affect investment inflows as part of trade and investment relations. Therefore, the dependent variable which is expected to be influenced by these arrangements is Foreign Direct Investment (FDI). In Chap. 5, this study discusses the ASEAN Economic Community (AEC), which started at the end of 2015. This AEC arrangement, according to economic community theory, is designed specifically to increase FDI inflows. In this chapter, this study uses both the theoretical perspectives and empirical results in its analysis, based on a field survey at firm-level in Indonesia. Chapter 6 discusses financial integration in ASEAN and this chapter as its name suggests, does not analyze the impact of trade on investment as the previous chapters but further observes the financial sector. Finally, given the discussion on real sector integration of trade and investment and monetary integration of the financial sector, the last chapter, Chap. 7 tries to foresee the potential future of ASEAN in completing its regional economic integration from trade of goods to financial integration.

Originally, AFTA was expected to create intra-regional trade (trade creation ) rather than to attract long-run investment of FDI inflows (investment creation ). This is expected to be achieved through an increase in intra-regional trade among its member states. Intra-regional trade affects FDI inflows in two ways: (1) an increase in horizontal FDI inflows from non-members in order to avoid trade impediments from discrimination by regional trade policies and (2) an increase in vertical FDI inflows from members due to the increasing benefits from intra-regional trade following the implementation of regional discriminative trade policies. Previous studies suggest that intra-regional trade increases FDI inflows, therefore, it is important to see one, indirect impact which is the impact of AFTA to intra-regional trade compared to the impact of intra-regional trade to investment (FDI Inflows) and two, direct impact which is the impact of AFTA to FDI inflows. Trade discrimination such as AFTA is also expected to enhance investment creation (FDI inflows) from non-members even though its main purpose is for intra-regional trade enhancement. This chapter takes a time-series framework from 1988 to 2008. 1988 was selected as it was the start of the first of AFTA’s five year preparation before it was officially signed in 1992. It limits time-series analysis to year 2008 for three reasons: First, after 2008, ASEAN started to prepare the ASEAN Economic Community, which came into force at the end of 2015. Two, the occurrence of a global financial crises, which changed ASEAN’s economic relations with other trading partners especially major economies which have been most affected by this crises. Three, ASEAN established several significant regional-plus cooperation to enhance its investment flows such as the ASEAN Japan Free Trade Area (AJFTA), ASEAN South Korea FTA, ASEAN China FTA , ASEAN India FTA and ASEAN Australia New Zealand FTA. These three considerations have significantly changed the major factors that affect FDI inflows in ASEAN region other than ASEAN FTA as such. Given its time-series framework, this chapter takes the founding members of ASEAN and in particular Indonesia, Malaysia, Thailand, and Philippines as the observation countries.

Direct bilateral free trade agreements (BFTA) may potentially attract FDI inflows from non-member to ASEAN members individually. This will strategically enhance trade and investment integration at the country level. Given its objective to attract FDI inflows, some references show that BFTA may potentially jeopardize AFTA’s objective to create discriminative trade agreement in order to attract FDI inflows from non-members. This risk is known as the “Asian Noodle Bowl Phenomenon.” This chapter explains that this study observes the impact of BFTA on FDI inflows of selected members of ASEAN—Indonesia, Malaysia, Thailand, and Philippines. This chapter attempts to see which member is most appropriate to adopt BFTA and which are not. The role of BFTA whether as a stumbling block (the noodle bowl phenomenon) or building block for the AFTA in regards to of increasing FDI inflows is discussed in Chap. 2 .

This study chooses natural rubber for two reasons, (1) the Southeast Asian countries that had established this organization (Thailand, Indonesia, and Malaysia) are the world’s main producers of natural rubber and controls up to 65 percent of its share. (2) Natural rubber is among one of the top 11 priority products in the AEC. This chapter discusses about the ITRO (International Tripartite Rubber Organization)’s role to increase FDI inflows as a proxy for trade and investment integration in Southeast Asia especially to Indonesia, Malaysia, and Thailand as the ASEAN members that control the natural rubber production in the world. The main reason for using this cooperation as an indicator for assessing the sub-regional cooperation within limited ASEAN member states is because this cooperation is more practical given its specification on particular product cooperation compared with other sub-regional forms in Southeast Asia without a specific product to be managed such as the Indonesia Malaysia Thailand Growth Triangle, Singapore Johor Riau, and Brunei Indonesia Malaysia Philippines East ASEAN Growth Area. The organization and the product that is being managed is clear, and is managed in a well-established regulation for both production and trading aspects. This organization is essential to be adopted as the mean to assess ASEAN’s sub-regional economic cooperation since it was established by limited members of ASEAN: Indonesia, Malaysia, and Thailand, which are the selected observed ASEAN members in this study.

Empirically, the phase of an Economic community is the longest among the EU’s formation phases, amounting to 20 years from 1967 to 1987, while other phases such as FTA, Common Market (CM), Single Monetary Union (SMU) and Single Currency of Euro (SC) took only 10 years to be completed. The Economic Community or also known as a Custom Union (CU) in theory covers both trade and investment integration and is an essential phase for any regional economic integration progress. Theoretical studies suggest that a CU is required which unfortunately ASEAN does not have. Yet it is plausible for AFTA to increase FDI inflows as long as it utilizes the open regionalism framework since ‘foreign investors favour liberalization in a region-wide market’ (Ravenhill 1995, p. 856). Can ASEAN achieve economic community without CU? This chapter attempts to answer this with the success story of the implementation of ASEAN’s open regionalism principle, which attracted FDI inflows from new non-members after they joined ASEAN. The framework is known as ‘ASEAN Plus’ Framework such as the ASEAN-China FTA (2010), ASEAN-Japan FTA (2008) and ASEAN-South Korea FTA (2008). This study features Indonesia’s private sector opinions on the AEC both from manufacturing and service sector firms. These opinions were obtained from a recent field survey conducted in Indonesia in 2014. It involved around 345 manufacturing and 187 service-sector firms in six big cities in Indonesia. Further, this chapter features an analysis based on a hypothesis that ASEAN can complete its economic community with the role of sub-regional economic cooperation based on infrastructure network cooperation from the study entitled ASEAN Economic Community : A Work in Progress edited by Das, Menon, Severino, Shrestha and published in 2013.

In addition to its assessment of ASEAN economic integration of trade and investment, this chapter attempts to analyze the enlargement framework of ASEAN of the ASEAN+3 (APT)as this framework is established to support ASEAN to have financial integration in the future. Historically, the APT was established in December 1997 and later institutionalized in 1999 by 10 ASEAN member states and 3 East Asian countries (China, Japan, and South Korea). It was established as a response to the Asian Financial Crises (AFC) which led ASEAN and East Asian countries of Japan and South Korea to enhance their economic cooperation from trade, investment, and finance. Therefore, to fully analyze financial and monetary integration, it is necessary for this study to discuss the APT. This discussion will focus on variable of inflation rate similarity (Fleming, 1971) because of: (1) ‘Similarity in inflation rate’ represents both short-run (trade and investment) and long-run equilibrium (financial integration) between ASEAN’s founding members and its counterpart and (2) For the short-run equilibrium, the inflation similarity was analyzed using the Error Correction Mechanism (real sector integration of trade and investment) while the long-run equilibrium was analyzed using stationarity and cointegration methods (monetary sector integration). These analyses are important to assess ASEAN’s capacity and potential success in achieving financial integration by shifting its regional economic integration from trade and investment to finance.

This chapter finally close discussion about the economic integration of ASEAN from both the real sector (trade and investment) and the financial sector. This includes all possible economic cooperation frameworks in ASEAN of regional, bilateral, sub-regional, and regional plus within the economic community context while the general conclusions are derived from all of these economic integration structures. This study in conclusion finds that ASEAN has the potential to complete comprehensive regional economic integration of real and financial sector in the future in particular throughout the utilization and implementation of ASEAN’s open-regionalism principle.